Tuesday 2 August 2016 3:22 pm

Banking shares plunge across Europe as stress test fallout rumbles on

Shares in Europe's leading banks have been dumped again today as the sector's woes pile up and questions over the rigour of recent stress test pushed sentiment down.

German lenders Commerzbank and Deutsche Bank are trading at all time lows and the problems facing Italy's financial services remains top of the agenda. Commerzbank issued a profit warning this morning and is down by more than seven per cent, while Deutsche Bank was kicked out of the Eurostoxx 50 as its share price has tumbled by nearly two-thirds over the past year.

Read more: The no-stress guide to the EU stress tests

In Italy, Monte dei Paschi eroded yesterday's gains and is down by more than 11 per cent. Despite coming bottom in the European Banking Authority's (EBA) assessment of 51 EU lenders, details of a €5bn (£4.2bn) rescue package won it friends on the market yesterday, though its popularity has proved fleeting. Compatriot Unicredit sunk by another 7.9 per cent following yesterday's heavy sell-off.

Jasper Lawler of CMC Markets said: "Monte dei Paschi’s rescue deal was a step in the right direction but the funds involved are too small and there are too many banks with too many non-performing loans to repeat the same model across the sector."

The sell-off in Italy came despite prime minister Matteo Renzi defending the health of the sector and stepping up his efforts to secure a bailout.

UK banks were also on the wrong side of the movers and fallers list today. Barclays  was down by more than three per cent, while RBS managed to recover earlier losses to stand just 1.8 per cent down. The pair fared poorly in the EBA tests, with both being found to have fairly weak capital buffers in the event of a financial shock.

The Eurostoxx banking index, which comprises 30 Eurozone-based lenders, was off by 4.5 per cent.

Russ Mould, investment director at AJ Bell added: "The market is clearly fretting over the impact of ever-lower bond yields and interest rates and their impact on bank profit-and-loss, and is presumably unconvinced by the reassurances offered by the EBA stress tests' conclusion that all is well and the banks' balance sheets are completely sound."