Investors should be bracing themselves for trouble if they hold European bank stocks, according to Commerzbank. In a new report, the broker states that with continuing economic uncertainty there is an increased risk to bank earnings.

It has cut net operating profits for the sector by 4% this year and by 8% in 2002. It believes that the banks now look modestly over valued with further down side risks and is adjusting its ratings accordingly.

The banks have outperformed the broader market by 32 per cent since the second quarter of 2000, as investors rotated out of technology, media and telecoms (TMT) stocks and into sectors regarded as having lower earnings risk.

That safe-haven status afforded to banks is under threat as a TMT market decline widens into a broader slowdown.

Commerzebank is changing its hold recommendation to reduce for Deutsche Bank, ABN Amro, Lloyds TSB, SocGen and IntesaBc. It is lowering its recommendations from by to hold for AIB and BiPop. But it remains positive about BNP Paribas, which recieves an accumulate rating rather than a buy.

Its favourites, which retain an accumulate rating, are Royal Bank of Scotland, Bank of Ireland and Fideuram.