Sluggish earnings sees some European banks downgraded

CREDIT Suisse First Boston (CSFB) yesterday downgraded several top European banks on valuation grounds but maintained its overweight rating on the sector.

Shares in Spanish giants Banco Bilbao Vizcaya Argentaria and Banco Santander Central Hispano fell 3.8% and 3.25% respectively by early afternoon trade after CSFB cut its ratings on both stocks.

Overall CSFB said the banking picture looked similar to 2002, where weak economic growth and uncertainty over market-related revenue made income growth challenging, though bad debts remained manageable.

“Stocks that combine defensive qualities with top-line growth are preferred,” the research note said.

The investment bank said its top picks were Britain’s HBOS, France’s Societe Generale, Bank of Ireland and Spain’s Banco Popular, all rated at “outperform.”

CSFB’s least preferred stocks were Commerzbank , HVB, BCP and Sweden’s Swedbank.

Among a raft of rating changes, it cut Dutch bank ABN AMRO, Swedbank and BBVA to “underperform,” while downgrading BSCH to “neutral” from “outperform.

Shares in Commerzbank fell 2.02% to 7.78 on the news.

Earlier this week CSFB downgraded British-based banking group Standard Chartered Plc to “underperform” from “neutral” but upped its rating on Europe’s second biggest bank, Royal Bank of Scotland and mortgage lender Northern Rock Plc to “outperform.”

The pan-European DJ Stoxx banking index dropped 1.7% to 267 points, still slightly up on the year-to-date.

CSFB said ABN AMRO had been one of the best performing stocks in the sector in the latter part of 2002 but now traded at a premium to its peer group, prompting its downgrade to “underperform.”

CSFB added that ABN’s earnings were at risk from a slowdown in US mortgage activity and the spread of Germany’s economic woes to the Netherlands. The bank also cited a higher Brazilian tax bill as a result of the real currency’s 10% climb at the end of last year.