European banking shares slide over fears of rising bad debts

Shares in a number of European banks went into reverse yesterday after a rash of negative comments from sector analysts fuelled fears that many would be hit by rising bad debts.

James Alexander, an analyst at Commerzbank, downgraded 10 European banks – including Lloyds TSB – accounting for 37 per cent of the sector by market capitalisation.

Stephen Kirk, an analyst at Deutsche Bank, added to the pressure with downgrades to HSBC Holdings, among others. "The sector is trading at its highest levels since 1998. Against this background, we view the risk of negative surprises in a number of areas is significant, through the second half of 2001 and 2002," he said.

SG Securities also cut forecasts for HSBC, citing concerns over "quite dire" short-term trading. Meanwhile, analysts at Merrill Lynch slashed their forecasts for Deutsche Bank, Credit Suisse and UBS, on weakness in investment banking.

Mr Kirk said that the UK was among the countries most vulnerable to an increase in bad debt charges.

In retail banking, loan volumes were decelerating while revenues from asset management were suffering amid the continuing weakness in the stock market. At the same time, already poor conditions in investment banking were set to worsen through the summer, he added.

Commerzbank's Mr Alexander likewise warned of higher debt charges and lower revenues from retail investment products, prompting him to cut the sector's forecast operating profits by 8 per cent next year and 4 per cent in 2001. "It's a double whammy. If the news continues to be bad then the banking sector will get hit. I don't know how bad it will get. Bad debt charges can hit earnings between one and 10 years after the event," he said.

The predominantly retail nature of many UK banks meant they posed lower risks, although a "fear factor" appeared to be having a greater effect on valuations than underlying fundamentals, Mr Alexander said.

Shares in HSBC fell 4 per cent to 77p while shares in Standard Chartered, which also has a large exposure to Asia, was down 6 per cent at 823p yesterday.

The falls came a day after the Patricia Hewitt, Secretary of State for Trade and Industry, put a freeze on megamergers in the UK banking industry by blocking Lloyds TSB's bid for Abbey National, its smaller mortgage bank rival.