Pain for banks to last into 2008: Morgan Stanley

LONDON (Reuters) - European banks face several more months of pain until they give additional details on the impact of the credit crisis along with full-year results next year, the head of European banks research at Morgan Stanley said.

"The fact that some banks probably won't know their full (mark-to-market losses), or even disclose their full (losses) until their full-year results, which don't come until February, means this could be quite painful," Huw van Steenis said at the Reuters Finance Summit in London on Tuesday.

"Almost every finance director I have spoken to across Europe assumes the interbank market will remain constricted until probably February next year, because that's the point at which you find out who's got what on their books."

Europe's lenders have been battered in the recent equity market sell-off, hit by "mark-to-market" losses and writedowns at U.S. group Merrill Lynch MER.N and Citigroup (C.N).

In the UK, Barclays (BARC.L) and Royal Bank of Scotland (RBS.L), the number two and three players, have lost roughly a quarter of their value since the end of July, with the combined market value of the sector down 25 billion pounds ($52.2 billion) since August.

CREDIBILITY HIT

In the UK particularly, pressure for greater disclosure is growing. Credit Suisse analysts called for more information from the banks in a note earlier this week, saying the fact there have been no profit warnings from the sector provided little comfort.

Morgan Stanley's van Steenis agreed the market would err on the side of caution until the situation was clearer. "It really has to come from disclosure," he said. "People want to know what's behind, what's on the books."

Van Steenis said he did not expect another major banking disaster in Britain or continental Europe after troubles at Germany's IKB (IKBG.DE), SachsenLB and Northern Rock NRK.L, but said British banks could face a harder time raising funds as a result of the hit to the credibility of the UK system.

"It does have an impact, with even German investors having lack of confidence in the (UK) funding structure," he said, adding that in time there should be some return of confidence in Britain and possibly some regulatory change.

"But I think the second- and third-order consequences of the failure of Northern Rock will make the funding environment for UK banks quite restrictive, and more restrictive than when I talk to big Italian and Spanish banks," he added.

More broadly, van Steenis said British banks, already hit by worries over endowment mortgages and a regulatory investigation into overdraft pricing, could find other areas of profitability hit by the sector's watchdogs.

"The question on everyone's mind is, will there be a price to be paid by the system for the failure of Northern Rock? Not only the insurance scheme for the banks, but more broadly whether there will be more pounds of flesh to be extracted."