UK banks are firmly on the back foot at the moment as sovereign debt fears have been reignited by a number of credit rating agencies downgrading European debt. However, Shareprices.com, the free website providing free up-to-the-minute share information on all FTSE 100, 250 and 350 London Stock Exchange listed companies, expects to see the sector fall further out of favour in coming sessions as new lowered ratings are set to be slapped on struggling economies.

September has boasted a period of strong gains on global markets with the UK’s blue-chip index hitting new four-month highs. But the surge is set to hit a serious blockade as sovereign debt crisis returns to the forefront of investor minds this week with Anglo Irish Bank being the central catalyst for the downbeat sentiment.

Moody downgraded the bank’s debt late on Monday and since Standard & Poor’s has said the price of bailing out the nationalized lender would exceed $47bn and thus looks set to cut Ireland’s credit rating, along with Fitch, as a result.

And with Spain also potentially facing similar credit rating cuts in the coming week, investors are being warned off European bank stocks altogether in case one of the countries defaults on its debt.

Barclays (LON:BARC), Royal Bank of Scotland (LON:RBS) and HSBC Holdings (LON:HSBA) have all been identified as avoidable stocks with all of them having substantial holdings in European sovereign debt.

European bank stress tests discovered Barclays was holding €787m of Italian sovereign debt and has recently leapt to a colossal €8.6bn, exceeding the bank’s Spanish sovereign debt holding of €6.4bn.

Royal Bank of Scotland was also found to hold €1.6bn in Spanish sovereign debt and €300m in Irish sovereign debt along with substantial holdings in Italy’s debt, too.

And the bank stress test reports said HSBC Holdings was holding €800m in Spanish and Greece sovereign debt.

These large-scale holdings in under-fire economies may heavily restrict banking stock headway whilst sovereign debt fears continues to hit news headlines and weigh on the UK’s top index.

David Holmes, the founder of Shareprices.com, said anyone looking into buying bank shares or currently having shares in the likes of RBS and Barclays should be watching the market closely in the coming days.

Holmes said: “Right now banks appear to be very vulnerable.

“Any report that feeds negative news about sovereign debt will automatically cut the share prices of banking stock. However, the information gathered during the recent EU bank stress tests means we all have access to just how involved UK banks are, which may worsen the blow further for the likes of Royal Bank of Scotland, HSBC and Barclays.

“With Shareprices.com having a fast feed to the market and constant updates, anyone with interest in banks should be closely monitoring their online share dealing to keep track of all activity as it happens, when it happens.”

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