The logo for Citibank is seen on the trading floor at the New York Stock Exchange NYSE in Manhattan, New York City.
The rapid pace of interest rate hikes will further affect economic activity and lenders' profits, and Citigroup said that it expects the region-wide equities index to remain near current levels by the end of the year.
The Wall Street brokerage cut its rating on European banks to neutral from overweight in a note dated Wednesday, saying that the likely continued monetary policy tightening adds to worries about the global banking sector.
Equity strategists led by Beata M Manthey said that the ongoing confidence crisis could limit banks risk appetite and reduce the flow of credit.
They preferred technology stocks and upgraded the sector to overweight because of healthy cash balances and several growth drivers.
Citigroup trimmed its 2023 year-end forecast for the pan-European STOXX 600 index by more than 5% to 445 points, which is a 0.4% decline from current levels.
Citi expects the blue-chip index to end the year at 7,600 points, less than 1% higher than current levels, as it reduced its forecast for UK's FTSE 100 index by 5%.
The STOXX has risen 5.24% this year, while the FTSE 100 has gained 1.54%.