Banks set for more stock, earnings pain: SVM

LONDON (Reuters) - British and other European bank shares are likely to reverse to new lows and their dividends and earnings could come under pressure as their models adjust to a less-leveraged future, a UK fund manager said on Tuesday.

"We are very underweight financials and banks and still think there will be better levels for those stocks," Colin McLean, managing director for SVM Asset Management, said at the Reuters Hedge Funds and Private Equity Summit on Tuesday.

McLean said there was a lack of trust and confidence across the banking sector after the global credit crunch, reflected by high interbank borrowing costs as banks were reluctant to lend to each other.

"I think the lack of interbank confidence has been a lack of trust, and I don't think we can expect the stock market to trust what banks say if banks don't trust each other," he said.

"There are a mixture of different issues for banks, but the overall issue is excess leverage. Banks are running a very high level of activity relative to their underlying assets.

"The banking business model will be a bit more different in the future and the earnings ability with that will be less.

"I don't think the market has taken on board the possibility of future dividend cuts or the future earnings model."

He declined to pinpoint specific banks set to hit trouble, but said British, Irish and Spanish lenders could come under most pressure.

Edinburgh-based investment boutique SVM has 758 million pounds ($1.5 billion) in assets under management, divided among investment trusts, regular equity funds and two hedge funds.

(Reporting by Steve Slater; Editing by David Hulmes)