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Europe: Deutsche Bank lags as shares extend post-Brexit bounce

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[MILAN] European shares rose for a third straight session on Thursday, with expectations of central bank stimulus helping ease jitters over Britain's vote last week to exit the European Union.

Deutsche Bank however fell to an all-time low after its US unit failed stress tests and the IMF said the German bank was the biggest potential risk to the wider financial system.

The pan-European STOXX 600 index rose 1 per cent, reversing initial weakness. The index ended June with its worst monthly performance since January and is still 4.8 per cent below levels reached before the shock UK vote, which triggered worries about political risk in Europe, hitting bank stocks.

"Investors are expecting more central bank stimulus and this explains why European shares are rebounding," said Yann Quelenn, Swissquote Bank market analyst in Geneva.

The UK'S FTSE closed at its highest level for 2016, having completely erased the Brexit sell-off, boosted late in the session by comments from Bank of England Governor Mark Carney who said the central bank would probably need to pump more stimulus into Britain's economy.

Swissquote's Quelenn said bank stocks were however likely to remain under pressure and that any more sign of EU dislocation could weigh particularly on Italian and German lenders.

"Italian banks have a bad loan problem, while Germans are seen as fragile due to their high derivative exposure," he said.

Deutsche Bank fell 2.7 per cent after touching 12.05 euros, an all-time intraday low.

The US Federal Reserve said late on Wednesday that its US unit had failed stress tests yet again this year because of poor risk management and financial planning, not for lack of capital.

The International Monetary Fund also delivered a blow to Germany's biggest bank by saying its links to the world's largest lenders made it a bigger potential risk to the wider financial system than any other global bank.

Italian lenders reversed initial weakness with the bank sector index ending up 2.1 per cent after the European Commission authorised a six-month guarantee scheme to provide liquidity to solvent banks in case of need.

UniCredit rose 2.3 per cent as it picked Jean Pierre Mustier to become its new CEO, a choice likely to lead to a multi-billion-euro capital increase and asset sales to boost the bank's financial strength.

Royal Bank of Scotland, down more 30 per cent since the Brexit vote, fell another 4.7 per cent after Morgan Stanley cut its rating on the stock to "equal weight" from "overweight".

Europe's utilities, food and beverage and oil and gas sector indexes were among the top gainers, all recovering from the steep losses suffered after the UK vote.