Banks hold back FTSE as Deutsche Bank's loss causes jitters

Mon Jan 20, 2014 11:11am EST

* FTSE 100 flat near 8-month high

* ING sees FTSE hitting new 13-yr peak soon

* Deutsche Bank loss a bad omen for UK bank results

* Weir rises as data, Redburn point to sector pick-up

By Francesco Canepa

LONDON, Jan 20 (Reuters) - A selloff in banking shares dragged Britain's FTSE 100 off an eight-month high on Monday as a surprise loss by Germany's Deutsche Bank was seen as a bad omen for UK lenders' results.

However, Britain's main share index was expected to resume its uptrend soon and hit highs not seen since 1999, boosted by a continued flow of money into European shares as the region's economy improves.

Royal Bank of Scotland and Barclays shed 1.4 percent and 1.6 percent, respectively, by 1519 GMT, the top fallers on the FTSE 100, after Deutsche Bank announced a pre-tax loss for the fourth quarter.

The German bank blamed the loss on a fall in revenue at its debt-trading divisions as well as costs for litigation and restructuring.

Barclays and RBS, both due to report fourth-quarter earnings next month, derive around 20 percent and 15 percent respectively of total group income from trading in fixed income, currencies and commodities (FICC), according to Shore Capital estimates.

Shares in the two UK banks had risen 6.1 percent and 7.6 percent respectively since the start of the year before Monday's falls, boosted by healthier prospects for the British economy.

"It would be sensible to expect weak performances from the likes of Barclays and Royal Bank of Scotland in Q4," Gary Greenwood, an analyst at Shore Capital, said. "The risk (for the stocks) is to the downside given the rise that we've had."

Analysts at Goldman Sachs also warned that so-called non-recurring items such as fines, provisions and charges, have become a persistent feature of UK banks' results and raise question marks over lenders' return on equity targets.

Commercial banks knocked a combined 8.2 points off the FTSE 100, which was up 0.36 points at 6,829.66 points after ending at an eight-month high on Friday.

The index has risen 1.2 percent so far this year and is just 0.6 percent away from a 13-year high of 6,875 hit in May, which in turn is 1 percent off the index's all-time peak of 6,950 points, set in late 1999.

Technical charts on the FTSE were still bullish after the index broke through a trend-line connecting its May 2013 high and a top made in October last week.

"It looks pretty solid and I believe the (2013) highs will be broken within the next few days or weeks," Roelof-Jan Van den Akker, senior technical analyst at ING, said.

While the FTSE, due to its global nature, has lagged most other big European indexes since the start of this year, it is still benefitting from a recent pick-up in economic data from the euro zone, Britain's biggest trading partner.

Flows into Europe equity funds absorbed over $4 billion in net investment inflows in the seven-day period to Jan. 15 - recording their fourth-biggest weekly total on record, according to fund-tracking firm EPFR Global.

Helping buoy the FTSE on Monday was oil & gas engineering firm Weir, which rose 4.5 percent after data showed an increase in the number of U.S. natural gas and horizontal rigs last week and Redburn Partners initiated coverage of the stock with "buy", citing improving activity in the sector.

Volume on Weir's shares was 23 percent higher than its full-day average for the past three months, compared with FTSE volume of less than half the index's own average. Trading on the index was quiet due to U.S. stock markets being shut for a holiday.

Gold miners Fresnillo and Randgold were the top FTSE risers as gold hit a six-week high and data showed hedge funds and money managers raised their bullish bets on the metal for a third consecutive week.

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