* FTSEurofirst 300 down 0.8 pct, trims last week’s gains
* Investors book profits on banking shares after ECB tests
* Morgan Stanley strategists remain ‘overweight banks’
By Blaise Robinson and Sudip Kar-Gupta
PARIS/LONDON, Oct 27 (Reuters) - European stocks fell on Monday, as investors booked the gains they made after the European Central Bank’s review of the region’s banks and an index of German business sentiment dropped to its lowest in almost two years.
Following an early rally, most euro zone banking stocks turned negative as traders took profits after. The sector had risen 14 percent since mid-October in the run-up to the results of the ECB review.
“I think it’s a case of ‘buy the rumour and sell the fact’,” said Terry Torrison, managing director at Monaco-based McLaren Securities.
“We had a decent run-up ahead of the stress-test results, but everyone was jumping on the bandwagon and ramping things up this morning without any clear reason, given that the results of the stress test were in line with market expectations.”
Among the few gainers, shares in Austria’s Erste Group Bank added 4.5 percent and Raiffeisen Bank International rose 2.9 percent. Both banks passed the tests.
Overall, the STOXX euro zone bank index was down 2.3 percent in afternoon trading, surrendering some of the gains from the past 10 days. Spain’s BBVA, France’s Societe Generale and Germany’s Deutsche Bank - which all passed the tests - were down 1.7 to 3.5 percent.
Among the banks which failed the tests, Italy’s Monte dei Paschi tumbled 21.9 percent after the ECB review found it had the biggest capital hole to fill among European banks.
Overall, the results of the tests were considered positive by traders and fund managers.
“This is an important step for European banks on the road to a banking union,” Barclays France fund manager Philippe Cohen said. “The overall positive results of the tests will add to the ECB’s accommodative policy and should boost lending in the euro zone. Investors’ focus will now turn to data on lending in the region.”
Following the results of the ECB review, Morgan Stanley strategists reiterated their ‘overweight’ recommendation on European banking stocks.
“This is the sector with the most significant earnings rebound potential: RoEs (return on equity) are at the bottom of their 40-year range, but should rebound as provisions start normalizing from crisis-levels,” they wrote in a note.
At 1430 GMT, the FTSEurofirst 300 index of top European shares was down 0.8 percent at 1,302.58 points. The index chalked up gains of 2.5 percent last week, recording its best weekly gain since December 2013.
Hurting sentiment on Monday, the Munich-based think-tank Ifo’s business climate index, based on a monthly survey of some 7,000 firms, fell to 103.2 from 104.7 the previous month, suggesting Europe’s largest economy could be in for a bumpy ride in the fourth quarter.
Around Europe, UK’s FTSE 100 index was down 0.6 percent, Germany’s DAX index down 1.2 percent and France’s CAC 40 down 1 percent.
Shares in TNT Express sank 6.8 percent after the Dutch logistics company issued a fresh alert over the impact of fierce competition and weak growth in its core markets.
Europe bourses in 2014: link.reuters.com/pap87v
Asset performance in 2014: link.reuters.com/gap87v
Today’s European research round-up
Editing by Tom Heneghan, Larry King