UK banks caught in the ECB crossfire

BANKING stocks were rattled yesterday after the European Central Bank (ECB) dashed investors’ hopes that it would take a bigger role in tackling the eurozone debt crisis.

Despite passing the stress tests put in place by the European Banking Authority (EBA), British lenders were still hit by the negative sentiment surrounding the continent’s banks.

The EBA said Europe’s banks needed to raise an extra €114.7 billion (£98bn) to reach new minimum capital targets.

Lloyds Banking Group fell to the bottom of the FTSE 100 index, down 7.4 per cent or 2p to 25.08p, while Royal Bank of Scotland was not far behind, 5.5 per cent or 1.22p lower at 20.92p.

While ECB president Mario Draghi unveiled a package of measures designed to help contain the crisis, including a cut in interest rates, he ruled out further bond buying that would lower borrowing costs for indebted governments.

Michael Hewson, an analyst at CMC Markets, said: “Investors who were hoping for a more decisive steer from the ECB were left disappointed.

“The refusal to commit to buying unlimited sovereign bonds, as well as closing the door to back door financing of Europe via the International Monetary Fund saw markets slip back after initially starting the day in positive territory.”

The Footsie closed down 63.14 points or 1.1 per cent at 5,483.77, having hit a high of 5,605.27 earlier in the session before the ECB’s announcement.

The pound was up against the weakened euro at €1.17 but down against the dollar at $1.56.

In corporate news, attention was focused on supermarket operator Tesco after it reported a 0.9 per cent drop in like-for-like sales for the UK in its third quarter.

Tesco said this represented a promising performance but analysts were hoping for more of a sales boost from its £500 million price-cutting campaign and shares initially fell before steadying to close 0.3p higher at 397.2p.

Luxury goods firm Mulberry continued to impress the City after reporting pre-tax profits of £15.6 million, up from £4.7m in the previous year, as revenues lifted 62 per cent to £72.3m.

Analysts said there was plenty of room for more growth, particularly in Asia, as shares rose 6p to 1,500p.

Traders were also digesting quarterly changes to the make-up of the FTSE 100 index, which will see minerals groups Polymetal and Evraz enter the top flight, along with Dublin-based builders’ merchant CRH. Banking group Investec, satellite firm Inmarsat and platinum miner Lonmin will be ejected on 16 December.

Elsewhere in the FTSE reshuffle, struggling companies including retailer Mothercare, Mr Kipling and Branston pickle owner Premier Foods and travel agent Thomas Cook were all demoted into the FTSE small cap index from the FTSE 250.

Among the Scottish stocks, Perth-based investment manager Braveheart was flat at 20.5p despite Envestors, its London-basesd subsidiary, raising £882,000 for Cherrygood, a fruit juice maker that has received a sales boost in recent weeks following the appearance of cherry drinks on Channel 4 television show The Food Hospital.