Credit Suisse, Deutsche index exclusion another blow to European banks

LONDON (Reuters) - Two of Europe's biggest banks - Credit Suisse CSGN.S and Deutsche Bank DBKGn.DE - will be dropped from an index of Europe's top 50 blue-chip companies next week in a further blow to the embattled sector.

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For Deutsche Bank, it will be the first time since 1998 that it will no longer be a member of the STOXX 50 .STOXX50.

Shares of both were firmly in the red on Tuesday, with Credit Suisse down more than 5 percent and Deutsche off 3.5 percent.

The decision by STOXX Ltd, which manages Europe’s top benchmark stock indexes, came following a near halving in value of Credit Suisse and Deutsche shares this year. Deutsche shares are now more than 88 percent below their 2007 peaks.

Banks in Europe are grappling with deteriorating profits, slumping investment income on the back of collapsing yields and higher regulatory costs.

Commerzbank's CBKG.DE warning on profits and negative interest rates sent its shares to a record low on Tuesday.

While the results of the latest health check on regional banks by the European Banking Authority were greeted by investors with a sense of relief, the fact that the tests did not take into account interest rates staying negative for a long time has met with criticism.

“If rates stay this low, interest income will not be that much of a contributor to the capital base and from that angle, it’s difficult to see the banks being in a strong position,” Gerhard Schwarz, head of equity strategy at Baader Bank in Munich, said.

Exclusion from a benchmark generally means that exchange-traded funds and other passive investors that track the index will be forced to sell the shares.

The European banking index .SX7P fell 2.8 percent, the worst sectoral performer, taking this year's total losses to more than 30 percent.

The two banks will be replaced by technology firm ASML Holding ASML.AS and construction company Vinci SGEF.PA in the STOXX Europe 50 index .STOXX50. STOXX Ltd, which operates Deutsche Boerse Group's DB1Gn.DE index business, said late on Monday that the changes will become effective from Aug. 8.

Reporting by Atul Prakash; Additional reporting by Vikram Subhedar and Sudip Kar-Gupta Editing by Mark Potter