Barclays PLC (LSE:BARC) has downgraded its rating on European banks as strategists see a tougher outlook for the sector.
European banks have benefitted from net interest income generated by high interest rates but now that the European Central Bank is expected to cut rates rapidly over the coming months, this boost to banks’ bottom lines is getting eroded.
Weaker EU growth is also a factor in the downgrade to a 'market weight' rating from the previous 'overweight'.
"Shorter term, we worry the ECB will need to cut more than expected to stabilise the economy, which could pressure NIMs [net interest margins]," the equity strategists said.
Barclays also closed its 'underweight' position on the auto sector and discretionary stocks due to an improving situation for consumers.
"We close our UW on autos as the recent round of severe profit warnings, and poor performance, means a lot of the bad news is likely in the price now," analysts said.