LONDON/MILAN: European shares fell for a seventh consecutive session on Tuesday to touch their lowest level in more than two years as worries about the impact on banks of sustained low interest rates kept sentiment fragile.
The pan-European FTSEurofirst 300 lost 1.6 percent to close at 1,219.82 points after falling by as much as 2.6 percent to its lowest since September 2013.
The European banking index fell 4 percent, reversing earlier gains after Monday's 5.6 percent slump. The index was set for its seventh consecutive week of declines, the worst weekly losing streak since 1998, as investors fret over the threat to banks' profitability and capital strength from compressed interest rate margins.
"The mood is clearly negative. What is needed is a strong and clear message from the ECB," said Activtrades Chief Market Analyst Carlo Alberto De Casa.
Deutsche Bank shares fell 4.3 percent. Late on Monday the German bank said it had "sufficient" reserves to make payments due this year on AT1 securities. Its shares had slumped 9.5 percent on Monday on concerns about its ability to maintain bond payments.
Elsewhere in the sector, UniCredit fell 7.9 percent as better than expected results failed to reassure investors. Credit Suisse, UBS and Barclays were all down by between 4.6 percent and 8.4 percent.
Analysts said the sector was prone to further weakness in the near term. The cost of insuring bank debt against default eased slightly from Monday's advance to its highest since late 2013. Borrowing costs in Spain, Portugal and Italy jumped as investors demanded a fatter risk premium over safer German paper, where two-year yields hit record lows.
"The CDS (credit default swap) market is indicating a future financial stress for bond holders in the banking sector. There are concerns that the banking sector is undercapitalised in Europe and credit conditions are sub-optimal," said Lorne Baring, managing director of B Capital Wealth Management.
"Combined with the global macro backdrop, with Chinese growth slowing down, there is a natural impact around the world and the banking sector is bearing the brunt. There could be a wave of defaults in the energy sector and that will damage the balance sheet of the banking sector."
Goldman Sachs said that while there were no signs of strain in terms of euro or U.S. dollar funding in money markets for European banks, market liquidity had reduced nevertheless.
Miners, down 5.4 percent, were the top sectoral faller. Anglo American dropped 11.2 percent after its Kumba division posted lower profit and Antofagasta fell 9.4 percent after Goldman Sachs downgraded the stock to a "sell".
Among the few gainers, Vestas rose 4 percent after the world's biggest wind turbine maker beat earnings forecasts, while Telecom Italia rose 3.6 percent on ubpeat expectations over the Italian phone company's new business plan due next week.
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