European shares fall, cap hike worries hurt banks

* FTSEurofirst 300 falls 0.5 pct after 4 sessions of gains

* Financials down; Italian banks fall on capital hike news

* For up-to-the-minute market news, click on [STXNEWS/EU]

By Atul Prakash

LONDON, March 29 (Reuters) – European shares retreated in
morning trade on Tuesday, led lower by financials, with Italian
lenders sharply down after UBI Banca’s (UBI.MI: Quote, Profile, Research) surprise
announcement of a 1 billion euros ($1.4 billion) capital hike.

Analysts said there were concerns that other banks might
follow suit, while investors also stayed cautious ahead of the
results of stress tests on Irish banks, due on Thursday.

At 0955 GMT, the FTSEurofirst 300 (.FTEU3: Quote, Profile, Research) index of top
European shares was down 0.5 percent at 1,119.54 points. Banks
were the top decliners, with the European sector index (.SX7P: Quote, Profile, Research)
down 1.1 percent, UBI Banca falling 9.7 percent and Banca
Popolare Di Milano (PMII.MI: Quote, Profile, Research) down 6.2 percent.

“We are still very cautious on the banking sector as a
whole. Italian banks do look somewhat under-capitalised and as
we have seen lately, there are a lot of moves to boost banks’
capital to avoid a repeat of the crisis,” said Felicity Smith,
fund manager at Bedlam Asset Management.

“The big problem is that they need to hold more capital and
that means in future, even if the economy grows, the returns
they generate would be lower.” Bedlam manages $700 million.

UBI Banca announced late on Monday a capital hike aimed at
boosting its core Tier 1 capital ratio to 8.01 percent, based on
an end-2010 simulation, ahead of Basel III rules on banks’
capital and another EU stress test. [ID:nLDE72R23Z]

“The banking sector is still vulnerable to the euro zone
debt crisis and the Irish banking system is under severe
pressure,” said Tammo Greetfeld, equity strategist at UniCredit.

“If the stress tests of the Irish banks reveal that capital
requirements substantially increase previous estimates then it
would cast doubts about the ability of the officials to
correctly assess the health of banks and their potential capital
needs.”

STRESS TESTS

Ireland is conducting fresh stress tests on all its banks as
part of an EU-IMF bailout and will publish the results on
Thursday at 1630 GMT. Under the tests, all lenders will have to
have a minimum core Tier 1 ratio of 10.5 percent.

Irish shares (.ISEQ: Quote, Profile, Research) were down 0.7 percent, while Britain’s
FTSE 100 (.FTSE: Quote, Profile, Research), Germany’s DAX (.GDAXI: Quote, Profile, Research) and France’s CAC 40
(.FCHI: Quote, Profile, Research) fell 0.2 to 0.4 percent. The Thomson Reuters Peripheral
Eurozone Countries Index (.TRXFLDPIPU: Quote, Profile, Research) was down 0.8 percent.

Greetfeld said he was underweight banks and expected them to
continue to underperform the broader equity market. UniCredit is
overweight sectors such as utilities, telecom and healthcare.

Smith said she had seen a lot of flows into mining stocks in
the past days, while the market also witnessed some flows out of
oils as people have become sanguine about the Libyan situation.

Miners gained, with the sector index (.SXPP: Quote, Profile, Research) up 0.5 percent
and Vedanta (VED.L: Quote, Profile, Research) gaining 1.5 percent. On the other hand, the
STOXX Europe 600 Oil & Gas index (.SXEP: Quote, Profile, Research) fell 0.8 percent.

Volumes on Euro STOXX 50 (.STOXX50E: Quote, Profile, Research) options were down more
than 50 percent from its 20-day daily average to 700,000 lots on
Monday, signaling perceived lower risk premium, Nick Tranter,
head of derivatives at Espirito Santo, said. [ID:nLDE72S0FW]

Some analysts remained positive and said investors will
focus on economic numbers for direction.

“Despite a backdrop of concerns, investors have been trying
to focus on the economic data. The weekly U.S. jobless figures
have not been too bad over the last couple of weeks and there is
some optimism that this Friday’s report will be good,” said
Keith Bowman, analyst at Hargreaves Lansdown.
(Additional reporting by Dominic Lau; editing by Elaine
Hardcastle)

European shares fall, cap hike worries hurt banks