March 24 (Reuters) – A steep selloff in banking stocks hit European indices on Friday as worries about the stability of the financial sector intensified, with the news of a U.S. probe on Credit Suisse and UBS further souring the mood.
The pan-European STOXX 600 index fell 1.5%, but a sharp recovery earlier this week put it on track for weekly gains.
Shares of UBS Group AG and Credit Suisse AG fell 6.3% and 6.7%, respectively, after Bloomberg News reported they are among the banks under scrutiny in a U.S. Department of Justice (DOJ) probe into whether financial professionals helped Russian oligarchs evade sanctions.
European banks fell 4.5% and were set for their third week of declines, after the failure of U.S. midsized lenders and the turmoil at Credit Suisse highlighted growing risks to banks in the wake of tightening financial conditions.
Deutsche Bank slumped 11.1%, becoming the top loser on STOXX 600, after a sharp jump in the cost of insuring against the risk of default. The German heavyweight said that it would redeem $1.5 billion Tier 2 notes due in 2028.
“We are still on edge waiting for another domino to fall, and Deutsche is clearly the next one on everyone’s minds (fairly or unfairly). Looks like the banking crisis hasn’t been entirely put to bed,” said Chris Beauchamp, chief market analyst at IG.
Austria’s Raiffeisen Bank International slipped 5.7% after Reuters reported the European Central Bank is pressing the bank to unwind its highly profitable business in Russia.
A series of interest rate hikes from the Federal Reserve and other central banks in Europe this week also added to fears of tightening financial conditions even as the U.S. central bank signalled a pause in its hiking cycle.
The STOXX 600 is up just 3.5% on a year-to-date basis, having risen as much as 10% at one point. The U.S. benchmark S&P 500, meanwhile, is up 2.8% so far this year.
An S&P Global survey showed business activity across the eurozone unexpectedly accelerated this month as consumers splashed out on services, but weakening demand for manufactured goods deepened the downturn in the factory sector.
“Over the coming weeks, we expect to see anecdotal stories emerge of problems around credit availability, followed thereafter by renewed weakness in some of the more traditional economic indicators and ultimately in earnings revisions,” said Graham Secker, equity strategist at Morgan Stanley wrote in a note.
(Reporting by Sruthi Shankar in Bengaluru; editing by Eileen Soreng and Anil D’Silva)
Reporting by Reuters bureaus; Writing Toby Chopra; Editing by Jason Neely and Catherine Evans
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