The volatility in bond markets have once again elevated the issue of funding for banks, Citigroup analysts said, adding that sovereign and interest rate risks could add further pressure to earnings.
According to analysts, including Stefan Nedialkov, the 24 European banks, who account for 65 to 70 percent of the sector's assets, issued 56 billion euros of long/medium-term funding in January but investors' macro-economic concerns are restricting their appetite for new issuance in February.
This could eventually drive up funding costs meaningfully, even as fears of crowding out by sovereign and corporate issuers appear overblown, the analysts said.
They estimate a 10 percent cumulative impact from increased funding costs on banks' normalized earnings under a stressed scenario.
Still, funding availability is unlikely to be a major issue for most banks through 2012, and the new stable funding ratio regulations from Basel only appear onerous for a relatively small number of banks, Citigroup analysts said.
The Basel Committee of central bankers and financial supervisors through their proposals -- dubbed Basel III -- is seeking to avoid a repeat of the credit crunch and reduce the industry's cyclical volatility by raising the quality of banks' capital, after many of the assets they were using crumbled during the crisis.
Belgian banking and insurance group KBC , Franco-Belgian financial services group Dexia SA and Britain's largest retail banking group Lloyds Banking Group will see the highest impact to normalized earnings and funding needs from higher funding costs and Basel III requirements, analysts said.
The impact will be smaller on Citigroup's key buy-rated stocks, which include Spain's second-largest bank BBVA , Greece's largest lender National Bank of Greece , Asia-focused bank Standard Chartered , and Swiss banks Credit Suisse and UBS AG , they added.
The DJ Stoxx index of European banks fell 0.25 percent to 207.30 points by 0910 GMT on Monday.
(Reporting by Tenzin Pema in Bangalore; Editing by Neha Singh)