Miners drag FTSE lower, Babcock slumps on rights issue
* Blue-chip FTSE 100 index falls 0.3 percent
* Miners, banks feature among top decliners
* Babcock International slips on rights issue
By Atul Prakash
LONDON, March 27 (Reuters) - Britain's top stock index fell on Thursday, with miners leading the retreat on lingering concerns their earnings could be hurt by weaker metals prices following an economic slowdown in China and improving supplies.
Banks also lost ground after the Federal Reserve blocked the U.S. units of Royal Bank of Scotland and HSBC from paying higher dividends or buying back their own shares, citing weaknesses in their capital planning.
Among sharp individual movers, defence support and engineering services group Babcock International topped the losers' list. It fell 6.7 percent after saying it had agreed to acquire helicopter transport services firm Avincis, funding the deal with a 1.1 billion pound rights issue.
Miners and banks, the two heavyweight sectors, took the most points off the FTSE 100 index, which closed 0.3 percent lower to 6,588.32 points and is down 3.3 percent this month.
The UK mining index fell 0.7 percent, taking total losses this month to nearly 6 percent on concerns that earnings of mining companies might disappoint in coming quarters due to pressure on prices of major metals.
"The outlook for commodity prices has changed quite substantially as the supercycle that we saw in China is coming to an end," said Henk Potts, strategist at Barclays Wealth.
"There has been a huge amount of investment in the mining sector during the boom years and that supply is just about to come through at a time when demand has been slowing down."
Precious metals miner Fresnillo dropped 4 percent, Randgold Resources fell 2.6 percent and Rio Tinto slipped 0.9 percent.
FINANCIALS UNDER PRESSURE
Financials were the second-biggest drag on the market after miners, with the banking index down 0.4 percent. Royal Bank of Scotland and HSBC were down 1.4 percent and 0.5 percent respectively following the Fed's rejection of their request for higher dividends.
Under the Fed rules, foreign banks will have to wall off their U.S. units and meet tougher capital requirements. Some traders said discussions about the U.S. stress tests were not over, however, so the banks could get off more lightly.
"It's a watching brief for UK banks ... but with any further downside they're likely to attract buyers," said Matt Basi, head of sales trading at CMC Markets.
"All of these things are done by negotiation, so it's not a case of HSBC and RBS making a proposal, the Fed saying no, and that being the end of it. It's a back-and-forth process, and we expect there to be a resolution at some stage in the near-term."
The sector also came into focus after the Bank of England urged banks to consider the risk of future spikes in interest rates when approving mortgages, and prepared tools to rein back potentially dangerous lending.
Despite recent weakness in British equities, analysts said the market outlook remained positive.
"Longer-term, there is still an increased appetite for equities. We like the energy sector because it is unloved, attractively valued, has got a very good dividend yield and there has been a re-focus on greater capex discipline, which is more shareholder friendly," said James Butterfill, global equity strategist at Coutts.
"We also like the pharmaceuticals sector, which is a good defensive play and has got attractive dividend yields."
According to Thomson Reuters Datastream, dividend yield for the British energy sector was 4.3 percent against a 10-year average of 3.6 percent. The pharmaceutical sector's dividend yield was now 4.1 percent, better than a long-term average of 3.4 percent. (Additional reporting by Tricia Wright; Editing by Catherine Evans)