European shares slid to a three-week low on Tuesday as some major companies reported poor results, with Commerzbank dropping to a record to lead banks lower after it warned that its earnings would fall this year.
Commerzbank was last down 7.7 per cent, the worst performer in the pan-European FTSEurofirst 300 index. The bank said its profits would suffer because businesses are borrowing less and negative interest rates are hurting its revenue .
In addition, investors are worried about its capital position after last week's European Union bank stress tests. Commerzbank was one of the 12 weakest banks among the 51 tested by the European Banking Authority.
The European banking index fell nearly 3 per cent, making it the worst-performing sector and taking this year’s total losses to more than 30 per cent.
“European banks are hampered by their profitability in various areas and by the low-interest-rate environment. These are additional headwinds on the top of pressures from increasing regulation and from litigation payments,” Gerhard Schwarz, head of equity strategy at Baader Bank in Munich, said.
“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.”
Credit Suisse fell 6.2 per cent and Deutsche Bank 3.7 per cent. The two banks will be dropped from the STOXX Europe 50 index next week, a further blow to the embattled sector. Deutsche Bank will drop out of the index for the first time since 1998.
“Europe's problem is simple - too much debt on bank balance sheets at too low a margin,” Berenberg analysts said in a note. "We wouldn't own a bank if we didn't have to.”
The pan-European STOXX 600 and the FTSEurofirst 300 both fell 1.1 per cent to their lowest since July 12.
Poor earnings hurt a number of stocks. German retailer Metro slumped 7 per cent after reporting an unexpected loss for its fiscal third quarter, caused largely by restructuring costs at its wholesale business in Germany.
Infineon, whose chips activate car airbags and enable cruise control, was down more than 4 per cent. Its profit and sales missed predictions as demand weakened at its power management and card payments businesses.
Valve-control systems maker Rotork sank nearly 10 per cent, the top faller in the STOXX 600 index, after saying it expected lower full-year margins than last year because of pricing pressure and higher overhead costs.