Weaker financials drag down European shares

* FTSEurofirst 300 down 0.3 percent

* Banks under pressure; Italian banks fall sharply

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By Atul Prakash

LONDON, March 29 (Reuters) – European shares dropped on
Tuesday, led lower by financials, with Italian banks under
pressure following UBI Banca’s announcement of a 1 billion euro
($1.4 billion) capital increase.

Analysts said there were concerns other banks might follow
suit, while investors were also awaiting results of stress tests
on Irish banks, due on Thursday.

At 0903 GMT, the FTSEurofirst 300 index of top European
shares was down 0.3 percent at 1,122.48 points.

Banks were the top decliners, with the European sector index
down 0.6 percent, UBI Banca falling 9.1 percent and Banca
Popolare Di Milano down 5.5 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 about $700 million.

UBI Banca announced a capital hike late on Monday 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.

“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.”

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

Miners were among the top gainers, with the sector index up
0.6 percent and Vedanta gaining 2 percent.
(Editing by Hans Peters)

Weaker financials drag down European shares