* FTSEurofirst 300 down 0.1 pct
* Deutsche heads for biggest one-day drop in 10 months
* High market valuations need to be justified by earningsgrowth
By Toni Vorobyova
It was the first of the region's lenders to report fourthquarter earnings.
Deutsche - which had not been due to release results untilJan. 29 - fell 4.0 percent after unveiling a fourth quarter lossof 1.15 billion euros ($1.56 billion) due to heavy litigationand restructuring costs, as well as weakness in fixed incometrading.
Debt sales and trading revenues fell 31 percent,year-on-year, raising concerns about performance at other bankswith a large fixed income business. Underscoring the problems inthat area, a source told Reuters that Swiss bank UBS will begin outsourcing its fixed income trading platform to twotechnology groups in an attempt to save costs.
The STOXX Europe 600 Banking Index dropped 0.7 percent, making it by far the worst performing sector.
"The figures of Deutsche Bank are surprising and there is noend to be seen, and therefore we are kind of critical about theconditions of the banking sector," said Oliver Roth, head traderat Close Brothers Seydler.
"I think we have seen the bottom of the crisis, but I don'tsee the end of the crisis. Therefore I see much more potentialin other sectors than banks."
The impact, however, was felt more broadly, with Deutsche'sloss following on from a profit warning from oil major Shell (LSE: RDSB.L - news)last week and adding to concerns that the earningsseason will not deliver the strong results needed to justifyhigh equity valuations and to enable further market gains.
"The market is trading on valuations which are gettingcloser to levels where any sort of earnings disappointment isgoing to be increasingly problematic," said Ian Richards,strategist at Exane BNP Paribas.
European equities are trading at around 13.6 times theirexpected 12 month earnings - around their most expensive in nineyears, according to Thomson Reuters Datastream.
The pan-European FTSEurofirst 300 index was steady at1,345.05 points by 1135 GMT, holding below last week's 5-1/2year peak of 1,346.23 points.
The DAX lagged other regional bourses, down 0.2 percent asDeutsche's drop took 19 points off the German index.The move put Deutsche on track for its biggest one-day fallsince March 2013, with Volumes at 148 percent of the 90-daydaily average by mid-session, even as activity more broadly wassubdued due to a public holiday in the United States.
On average, European companies could miss fourth quarterearnings consensus by 1.5 percent, according to StarMineSmartEstimates, which focus on the up-to-date predictions formhistorically most accurate analysts.
However, with SmartEstimates predicting a 3.9 percentyear-on-year drop in fourth quarter earnings, the bar has beenset relatively low for any possible upside surprises.
"On balance, we think this season will be an improvement interms of earnings surprises compared to the third quarterseason. Most of this expected improvement is because consensusrevised down earnings estimates very substantially while theeconomic backdrop remained broadly unchanged," analysts atGoldman Sachs (NYSE: GS-PB - news) said in a note.
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