Citigroup downgrades European Banks, sees STOXX 600 little changed by year-end

(Reuters) - Citigroup downgraded Europe's banking sector, warning the rapid pace of interest rate hikes will further weigh on economic activity and lenders' profits, and said it expects the region-wide equities index to remain near current levels by the end of the year.

The Wall Street brokerage cut its rating on European banks to "neutral" from overweight" in a note dated Wednesday, saying the likely continued monetary policy tightening adds to worries stemming from the turmoil in the global banking sector.

"The European banking sector's fundamentals look healthy. But the ongoing confidence crisis could limit banks' risk appetite and reduce the flow of credit," said equity strategists led by Beata M Manthey said in the note.

They, instead, prefer technology stocks and upgraded the sector to "overweight", citing healthy cash balances and several growth drivers.

Citigroup trimmed its 2023 year-end forecast for the pan-European STOXX 600 index by more than 5% to 445 points, which represents a 0.4% downside from current levels.

Citi also cut its forecast for UK's FTSE 100 index by 5%, now expecting the blue-chip index to end the year at 7,600 points, less than 1% higher from current levels.

The STOXX has risen 5.24% so far this year, while the FTSE 100 has gained 1.54%.

(Reporting by Aniruddha Ghosh in Bengaluru; Editing by Savio D'Souza)