Banks and Nestlé drag on European shares

European shares fell yesterday, led by a drop in shares of Royal Bank of Scotland ahead of a widely expected and hefty rights issue and Swiss food group Nestlé after a disappointing trading update.

Banks were the largest drag on the European market, after RBS confirmed in a brief statement that it was considering a rights issue, details of which could come today.

People familiar with the matter have said the bank will seek to raise up to £12 billion (€15 billion) and RBS shares fell by three per cent.

Adding to the negative tone in the financial sector were results from Bank of America, the largest US retail bank, which reported a 77 per cent drop in quarterly profit after $5 billion in write-downs and credit-related costs.

The FTSEurofirst 300 index of top European shares fell 1.06 per cent to 1,311.82 points.

The index gained more than three per cent last week after a flurry of positive earnings surprises on both sides of the Atlantic as the reporting season continues. "Last week was a good week - slightly surprising - but good, so a bit of profit-taking today is no shock," said Philip Isherwood, a European strategist at Dresdner Kleinwort. "I guess the feeling is that if you were going to warn, by now you should have warned and therefore, the first-quarter results season feels benign... and that's supportive."

Within the banking sector, Barclays lost 3.5 percent, Société Générale fell 1.7 per cent and Credit Agricole shed 3.4 per cent.

The sector also appeared to take no heart from a Bank of England plan to lend banks up to £50 billion to help operations during the credit squeeze.

JPMorgan said in a report that it estimates the capital shortfall for the four large UK banks - RBS, HBOS, Barclays and Lloyds TSB - at nearly £37 billion.

"If UK banks do nothing, then shrinking balance sheets could imply 25-35 per cent loss of earnings for the sector, according to our analysis," JPMorgan analyst Carla Antunes da Silva said in the report.

The bank estimates a capital shortfall of £13 billion at RBS, £11.4 billion at HBOS, £8.1 billion at Barclays and £4.3 billion at Lloyds TSB.

Outside the banks, Nestlé was among the heaviest weighted decliners, falling 1.7 per cent as a jump in first-quarter sales disappointed some investors and a weak dollar eroded gains in volume and pricing.

Around Europe, Britain's FTSE 100 fell 0.06 per cent, while Germany's DAX lost 0.8 per cent and France's CAC shed 1.0 per cent.

The commodities-heavy FTSE 100 was helped by gains in energy shares BP, Royal Dutch Shell and BG, which rose by more than one per cent, tracking the oil price which stayed within striking range of a record $117.40 a barrel.

The FTSEurofirst 300 shed 16 per cent in the first quarter as the world's top banks booked multi-billion dollar write-downs on assets backed by deteriorating US mortgage products, but has rallied enough in April to put it on track for its best month since September 2005.