UPDATE 1-Europe's stress tests fail to ease bank sector concerns

* Latest tests give banks broad clean bill of health

* Questions raised over failure to assess range of risks

* Bad loans and weak profitability weigh on valuations (Adds S&P on ratings, fund manager comment, UniCredit)

By Huw Jones and Sinead Cruise

LONDON, Aug 1 (Reuters) - The latest health check of leadingEuropean Union banks failed to end worries about profitabilityin the sector and the omission of risks such as the effect ofnegative interest rates and Brexit blunted its impact.

The European Banking Authority (EBA) published the outcomeof its health check of 51 lenders from across the EU on Fridayevening after markets closed, giving the industry a broadlyhealthy prognosis.

There were some surprises, for example two major Irishlenders and Barclays doing worse than expected, whileGerman duo Deutsche Bank and Commerzbank fared better than anticipated. But broadly the results showedthat banks have come a long way since 2014 in building up theircapital buffers.

Analysts said this year's test, the third in the EU and thefirst one without a pass or fail mark, was "no panacea". Theysaid major elements were missing, including the impact ofnegative interest rates on banks' ability to make a profit or amention of Britain's vote to leave the EU.

"Overall, the result of the test was rather reassuring in myview but the real issues of the sector, especially the lowrates, were not tested," said Dirk Becker, chief financialsanalyst with Allianz Global Investors.

At 1300 GMT, the Stoxx index of European banks wasdown 1.6 percent at 131 points, close to lows seen during thefinancial crisis.

The index has fallen 13 percent since Britain's vote toleave the European Union on June 23 darkened the region'seconomic outlook and added to concerns about banks' ability tomake money and deal with bad loans.

"This is just one step in the right direction, it's not thebe all and end all, and not too much can be read into theseresults," said George Karamanos, a banking analyst at KBW.

"We remain underweight in the sector."

Credit rating agency Standard & Poor's said the test resultswould not have any immediate impact on the ratings of banks.

BAD LOANS

Some experts flagged that while the tests bringtransparency, the problems they have highlighted are still along way from being addressed.

"We estimate there is still approximately a trillion eurosof non-performing loans clogging banks' balance sheets acrossEurope," said Edward Chan, a banking partner at law firmLinklaters.

Analysts said this year's EU stress test is unlikely toquash investor doubts about banks that have sent book valuestumbling to below those of U.S. rivals.

"I would not say it draws a line under the banking crisis,"said Gary Greenwood, a banks analyst at Shore Capital.

"But at some point you have to say this is not due to thecrisis anymore but to a need to address issues that have notbeen addressed by management."

Book values will go up on the basis of companies retainingprofits, not on the back of a stress test, Greenwood added.

Ian Tabberer, investment manager at Henderson GlobalInvestors, said it was clear that the long term earnings powerof some banks, the biggest driver of investor returns, remainsquestionable but this was not tested by EBA.

With Italy's Monte dei Paschi seen as the onlybank having to raise large amounts of capital, analysts say thestress test results will at least not put further downwardpressure on book values in general.

Monte dei Paschi shares were up 3.3 percent, with domesticrival UniCredit, which also did poorly in the test,down 7.9 percent before trading was suspended.

The results will be used by regulators -- the EuropeanCentral Bank for the 37 euro zone lenders that were tested -- todetermine overall capital requirements by year end.

"The main challenge for banks will be to demonstrate thatthe quality of their data and models is sufficient to reliablyidentify future risks and that they have sound processes inplace to manage these risks," said Burcu Guner, senior directorat Moody's Analytics.

(Additional reporting by Sinead Cruise; Editing by Keith Weir)