Lloyds' shares hit by concerns it may have to put plans to resume dividends on hold after being named as weakest of big UK banks

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Lloyds' shares were hit yesterday by concerns it may have to put plans to resume dividends on hold after being named as the weakest of the big UK banks.

Investors were unnerved by the results of the European Banking Authority’s ‘stress tests’, which were published over the weekend.

The sweeping exercise, which gauged whether banks across the EU have enough capital to survive another financial crisis, failed 24 out of 123 lenders.

Worry: Although all four UK banks who took part passed the 'stress tests', Lloyds only did so by a narrow margin

Although all four UK banks who took part passed the test, Lloyds only did so by a narrow margin.

Yesterday experts raised fears that Lloyds as well as other smaller UK lenders could fail a separate stress test set by the Bank of England – the results of which will be published in December.

If this happens its plans to pay its first dividend since 2008 next year could be blocked by the Prudential Regulation Authority – the Bank of England’s stability watchdog.

Analysts at Jeffries suggested Lloyds would not be able to pay a ‘material dividend’ to its 2.7m private shareholders until 2016.

Experts at Capital Economics said the PRA’s stress tests, which will assume a 30 per cent slump in house prices, ‘may prove tougher to pass’ and that several UK banks may be required to ‘raise even more capital, hindering new lending’.

Lloyds’ stock fell nearly 2 per cent, or 1.38p, to 75.34p.

Shares in HSBC (down 7.8p to 622p), Barclays (down 4.5p to 221.85p) and Royal Bank of Scotland (down 5p to 359.2p) also fell significantly despite all three banks passing the EBA’s stress tests with ease.

But other experts were adamant that the concerns have been overblown. The Bank of England has made it clear that the results of the EBA’s exercise are not indicative of its own test, which will take into account the extra capital raised by lenders including Lloyds this year.

The EBA test measured the state of banks’ balance sheets in December 2013.

Andrew Lowe from Berenberg said: ‘The concerns in the market are unjustified. We don’t think Lloyds will be prevented from paying a dividend.’

Worries about the health of the banking system pushed stock markets lower across Europe on another bleak day for the crisis-torn region.

The Spanish stock market fell 1.3 per cent in Madrid while Milan was down 1.2 per cent, Paris 0.6 per cent and Frankfurt 0.8 per cent. The Italian market was dragged down by concerns over its banks, after nine failed the EBA stress tests.

Shares in Italian lender Monte dei Paschi di Siena were suspended after its market value fell by more than a fifth. The Tuscany-based bank was identified by the EBA as having the biggest capital shortfall of £1.7bn.

The mood was not helped by a report showing business confidence in Germany has fallen to its lowest level in nearly two years – fuelling fears about the outlook for Europe’s largest economy.

The Ifo think tank’s closely-watched business climate index fell from 104.7 in September to 103.2 in October – the sixth decrease in a row.

‘The outlook for the German economy deteriorated once again,’ the report said. The Germany economy contracted by 0.2 per cent between April and June and there are growing concerns about its ability to bounce back in the second half of the year.

Another quarter of decline between July and September would mean Germany is back in recession in what would be a devastating blow to the eurozone.