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By Sinead Cruise
LONDON, June 27 (Reuters) - Shares in Britain's top bankssuffered further deep losses on Monday as fears about thefallout from Brexit sparked a litany of earnings downgrades andsell-offs by shell-shocked investors.
Shareholder anxiety about Britain's decision to quit theEuropean Union escalated despite calls for calm from Britishfinance minister George Osborne following a weekend of politicalchaos in Britain and the euro zone.
Barclays, Lloyds Banking Group and RoyalBank of Scotland were among the hardest hit with fallsof 11 percent, 9 percent and 14 percent respectively in dramaticearly trading that sent the STOXX Europe 600 bank index to its lowest since June 2012.
After lauding efforts by banks to cut costs, streamlineoperations and beef up balance sheets in recent months, a stringof analysts said the likelihood of catatonic interest rates andfalling credit demand in the wake of Brexit had put earningsprospects and dividend growth at risk.
"The market is justifiably concerned about thesustainability of earnings in a macroeconomically uncertainenvironment, and the ability to withdraw excess capital," RBCCapital said, in a note that slashed its price targets forBritish banks by 30 percent.
"UK rates markets are now pricing in a 25 basis point ratecut and no rate increases again until 2019. It seems at leastthat the uncertainty will lead to an economic slowdown," RBCsaid.
European banks did not escape.
Barclays analysts downgraded earnings expectations for aslew of continental lenders including Bankia, BancoPopulare, Intesa, UBI and Unicredit, citing rising political risk and fading hopes for alower cost of equity.
"The risks of anti-EU contagion, coupled with a number ofbinary events in the coming months - an Italian referendum inOctober, U.S., French and German elections beyond this - suggestit will be difficult for banks' costs of equity to fall anytimesoon," the Barclays note said.
A spokesman for Italy's Economy Ministry said on Monday thegovernment was looking at various options to try and prop up thecountry's bank stocks.
FRAYED NERVES
After double-digit stock falls on Friday, investor nerveswere frayed further by the resignation of EU CommissionerJonathan Hill on Saturday, the man many hoped would renegotiate'passporting' privileges that have turned British financialservices into the country's most lucrative exporters.
JPMorgan used its note to highlight the mountingchallenges faced by lenders with significant investment bankingoperations, cutting 2018 earnings per share estimates for thesector by 28 percent and rewriting recommendations for MorganStanley, Goldman Sachs, Deutsche Bank,UBS and Credit Suisse.
"European investment banks are to be avoided considering ourinability to assess short-term counterparty, liquidity, andmarket-gapping risk, but also structural uncertainty such as therisk of losing EU passporting, which would lead to netadditional staff and costs for investment banks," JPMorgan said.
JPMorgan estimated average 13 percent earnings per sharecuts in both 2017 and 2018 for European banks, on the back oflower loan growth and expected increases in both bank fundingcosts and bad debt provisions.
The Wall Street heavyweight downgraded all domestic-focusedUK lenders to neutral and underweight positions but joined rivalanalysts at Deutsche Bank in conferring preferred status onAsia-focused Standard Chartered and Europe's largestbank HSBC, describing both as defensive options.
Away from the stock markets, ballooning credit default swap(CDS) prices offered further insight into wilting investorconfidence in the ability of European banks to ride out thepolitical and economic storm triggered by Brexit.
CDS, which reflect the market appetite for insuring exposureto bank debt, showed the cost of insuring Barclays and RBS bondsagainst default had risen by almost a third between Thursday andFriday last week, according to June 24 data from Markit.
The Markit iTraxx Europe senior financials index soared to128 points on June 24, up from 95 points a day earlier. (Editing by Rachel Armstrong and David Clarke)
