Royal Bank of Scotland was pushed on the back foot last night, as the market veered sharply lower.
Investors sold out of the bank amid worries about the threat to margins from a combination of low interest rates, higher funding costs, the need to hold more high-quality Government securities and a switch from short-term to longer-term wholesale funding.
The concerns were first aired in the session before, when Credit Suisse highlighted the pressures in a note to clients, but gained added potency after RBS's chief executive, Stephen Hester, highlighted the issue in a presentation to a UBS financial services conference in New York overnight.
"Overall, the message is clear and the bank's conclusion mirrors our own primary concern on the sector – 'margin headwinds are serious'," Credit Suisse's analyst Jonathan Pierce said, quoting from the RBS presentation.
The concerns aided the profit taking trend, with investors ramping up moves to secure gains from the recent rally in bank share prices. As a result, RBS tumbled to 38p, down 12.6 per cent or 5.5p, while Lloyds Banking Group, which remains Credit Suisse's least favoured UK bank, retreated to 84.6p, down 5.1 per cent or 4.5p.
Overall, the FTSE 100 tumbled to 4,331.37, down more than 2 per cent or 94.17 points, while the FTSE 250 was 3.3 per cent or 252.73 points lighter at 7,371.19.
Besides early losses on Wall Street, traders said the market was thrown off course following news from the Bank of England, which published its latest Inflation Report, reducing growth forecasts and upping its estimates for future inflation.
On the FTSE 100, real estate issues suffered after Land Securities, which fell to 468p, down 13.2 per cent or 71p after unveiling a slump in the value of its portfolio, put an end to talk of a recovery in the commercial property market. Hammerson, down 11.7 per cent or 37.7p at 285.25p, and Liberty International, down more than 8 per cent or 33.2p at 362p, were caught in the downdraft.
Miners also weighed on the benchmark index, suffering as investors continued to bank profits on the back of a lacklustre update from the Eurasian Natural Resources Corporation, the Kazakh mining group which fell to 564p, down almost 12 per cent or 76.5p.
Xstrata was the weakest of the lot, losing 12.8 per cent or 87p to 594.5p, while Rio Tinto, which was the focus of renewed speculation about a possible rights amid reports that it still faced significant opposition to the Chinalco deal, relaxed to 2,503p, down 10.6 per cent or 298p. Antofagasta, which was downgraded to "underweight" from "equal-weight" at Morgan Stanley, fell to 555p, down 7.2 per cent or 43p.
On the upside, Compass led the way, rising by just over 6 per cent or 20.2p to 353p, as investors welcomed the catering group's half yearly report.
Pharma group Shire was also firm, rising to 878.5p, up almost 3 per cent or 23.5p, after Collins Stewart initiated coverage on the stock with a "buy" recommendation, telling clients that it saw an almost 50 per cent upside for investors from current levels.
The broker also attracted the attention of speculators, who seized on its assessment that, if the company's Vyvanse attention deficit hyperactivity drug delivers, it may be targeted by GlaxoSmithKline, which recently signed a deal to co-promote the drug in the United States. At close, GSK was 2p ahead at 1,056p.
Other defensives also traded higher, as investors switched out of riskier plays in the financial sector. British American Tobacco, for example, rose to 1,722p, up 1.5 per cent or 26p, while AstraZeneca climbed to 2,626p, up 1.4 per cent or 36p. Unilever, which was upgraded to "outperform" from "market perform" at Bernstein, gained 2.4 per cent or 35p to 1,506p.
On the second tier, Enterprise Inns, down 26.4 per cent or 42.2p at 117.75p, led pub companies lower, after the House of Commons Business and Enterprise Select Committee said the tenant tie-in system, which prevents pub tenants from using other companies for beer supplies, should be looked at by the Competition Commission.
Panmure Gordon, which weighed in on the issue, estimate that pub companies make 25-30 per cent of profits from "the margin that they derive from their buying scale and the fact that they have a tied customer base".
Also on the downside, Wellstream suffered a slide to 482p, down 8.4 per cent or 44p, after UBS moved its recommendation on the oil services group's stock to "neutral" from "buy". Citigroup also made a change to its stance, moving its target for the stock to 575p from 650p, while sticking to a "buy" recommendation.
Partygaming managed to buck the market trend, holding firm at 261.5p, up 2p, thanks to Morgan Stanley, which initiated coverage on the stock with an "overweight" recommendation.
"Under the current structure, we think the shares are slightly overvalued, and a see a 19 per cent share price downside to our base case of 220p," the broker said. "However, the range of options open to Partygaming is wide, and we expect significant structural change over the next 12-24 months. We do not think these options are fully priced into the stock."Reuse content