European shares ease, banks weigh

European share indexes eased yesterday, led by declines in banking stocks after France's Credit Agricole's first-quarter earnings disappointed some investors.

Italian banks Capitalia and UniCredit confirmed they were in merger talks to create Europe's second-largest bank, worth about $135 billion.

But, this was not enough to lift the broader European equity market, which has gained about seven per cent this year on the back of the flow of merger activity.

The pan-European FTSEurofirst 300 index closed nearly 0.2 per cent lower at 1,581.5 points, having made little advance all day.

Adding to the negative undertone was more weak US housing data for April, which showed permits for future building fell to their lowest pace in nearly a decade, highlighting the deterioration in the housing market.

"The market's basically flat, down a little bit maybe on the disappointing data in the US, but given the rise that we've seen it's nothing more than noise," said Bert Jansen, an equities strategist at Exane BNP Paribas in Paris.

In other European markets, London's FTSE 100 index eased 0.1 per cent, while Frankfurt's DAX shed 0.3 per cent and Paris' CAC 40 fell 0.5 per cent.

Credit Agricole shed over four per cent, its worst one-day slide in two months, after the bank reported a first-quarter net profit that missed expectations.

Hsbc accounted for a large part of the decline in the sector as its shares fell 1.5 per cent after trading ex-dividend.

But dealers said investors were also troubled by analysts' warnings that the bank's troubled US mortgage business would face stiff headwinds in the second half of this year.

Among the gainers was Swiss private bank Julius Baer, up 4.3 per cent to make it the best performing stock in the FTSEurofirst index, as traders cited market talk that Germany's Deutsche Bank could bid for the company. Both companies declined to comment.

Vedanta Resources rose 1.9 per cent, after the miner's results met forecasts.

Among the latest merger and acquisition speculation traders said miner Rio Tinto rose 2.6 per cent on speculation that Brazil's CVRD could be interested in the company.

Rio's stock also rose sharply last week on talk of a $100 billion bid from rival BHP Billiton and fell away when no actual approach materialised.

But HVB-UniCredit equities strategist Gerhard Schwarz said current conditions were good for merger activity to continue to drive stocks higher.

"We have seen some slowing in M&A in the last one to two weeks, but the drivers are still in place. Refinancing conditions are good - one can issue seven- to 10-year euro investment grade bonds at five per cent, which is below earnings yields," he said.