European stocks ended 1.3 per cent lower yesterday, reversing the previous session's tentative recovery as banks resumed their decline, hit by a negative note from Goldman Sachs on the sector. The FTSEurofirst 300 index of top European shares closed at 1,163.11 points, down 2.4 per cent on the week and showing a loss of 23 percent on the year to date.
Banco Santander, downgraded by Goldman to "neutral" from "buy", shed 4.3 per cent, while Royal Bank of Scotland lost 3.2 per cent and BNP Paribas fell 2.8 per cent.
Bradford & Bingley plunged 18 per cent. The UK lender said it will increase its rights issue to £400 million (€506 million) after US investor TPG Capital pulled out of buying a stake as concern deepened about the lender's business plan.
Banking shares have been hammered by fears over the impact of the crisis in the credit markets that have forced banks to unveil multi-billion dollar asset writedowns and emergency capital increases. The DJ Stoxx bank index, down 35 per cent so far in 2008, shed three per cent yesterday.
"It has become almost 'politically incorrect' to have banking stocks in a portfolio," said Alain Bokobza, head of strategy at Societe Generale, in Paris.
"But the market has already priced banks' return-on-equity to fall sharply, somewhere below eight per cent. That's an extremely dark scenario," he said. "All the big institutions that have announced capital hikes have been successful, and we could see losses gradually shrinking while capital injections are rising."
UBS shed 2.6 per cent, despite saying a tax credit should help it avoid a big second-quarter loss.
Goldman said European banks may need to raise €60-€90 billion in total. The broker lowered 2008-09 estimates for over 40 banks and said the sector would be hampered by the risk of additional capital raisings.
Around Europe, Germany's DAX index lost 1.3 per cent, UK's FTSE 100 index dropped 1.2 per cent and France's CAC 40 shed 1.8 per cent.
Luxury goods group LVMH fell 5.3 per cent as traders cited profit taking after the stock recently outperformed peers such as PPR, Puma and Bulgari.
"What you're seeing today is some funds actually shorting LVMH and going long PPR for example, only because they think that PPR and Bulgari have underperformed and LVMH has outperformed, so they are reversing the switch," a London-based trader said.
On the upside, UK retail stocks recovered from recent sharp losses spurred by Marks & Spencer's recent profit warning. Tesco gained 5.2 per cent and WM Morrison Supermarkets rose 2.8 per cent.
US markets were closed for the Independence Day holiday.