Poor earnings and Sweden's rate cut slam European banks

What the heck is a "negative" interest rate?
What the heck is a "negative" interest rate?

The rout in European banking shares has resumed.

Disappointing earnings from one of the region's biggest players, Societe Generale, and the prospect of even lower interest rates are scaring investors.

The French bank said fourth quarter profits rose 19.5% to 656 million euros ($742 million), but that was about 400 million euros short of analysts' expectations. Its shares plunged 11%.

Societe Generale (SCGLF) said profits could suffer this year because of "major headwinds" such as market volatility, new regulations and persistently low interest rates.

Most European banks are struggling this year. Their stocks are plummeting and investors are increasingly betting against them. The mixture of low interest rates, low oil prices, and new rules are hurting their profitability.

Interest rates in most of the developed world are still at record lows, which means much smaller margins for the banks.

The Fed has raised rates for the first time in a decade in December, with expectations that it would hike it four times this year -- but nobody believes that anymore and the markets are now pricing in zero hikes this year.

Related: Why investors are freaking out over European banks (again)

Sweden's central bank piled on the pressure Thursday by taking its main interest rate even deeper into negative territory to try to stoke inflation. Japan stunned markets last week by introducing negative rates, and the European Central Bank may be forced to cut rates even lower next month.

"Today's [rate] cut also seems to have been a pre-emptive move ahead of the ECB's March meeting, at which it is now widely expected to loosen policy further," wrote Jessica Hinds at Capital Economics.

Related: Forget oil stocks. Banks are killing your portfolio

Banking stocks were under pressure across the region: Credit Suisse (CS) and Unicredit (UNCFF) were down 8%, Deutsche Bank (DB) dropped by about 7% and Standard Chartered (SCBFF) in the U.K. fell 5%.

Societe Generale said it would slash costs in a bid to save 850 million euros by 2017. That comes on top previously announced measures to save 900 million euros.

Its litigation costs ballooned by 400 million euros to 1.7 billion euros ($1.9 billion) in 2015.

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