UPDATE 1-RESEARCH ALERT-KBW upgrades European banking sector

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July 7 (Reuters) - Keefe Bruyette & Woods Ltd raised the European banking sector to "neutral" from "underweight," saying with the sector trading at book value the downside in share prices seems limited.

The brokerage upgraded BNP Paribas (BNPP.PA: Quote, Profile, Research) to "outperform" from "market perform" and Credit Agricole (CAGR.PA: Quote, Profile, Research) to "market perform" from "underperform." It cut Banco Popolare (BAPO.MI: Quote, Profile, Research) to "market perform" from "outperform."

Keefe Bruyette said its top picks in the sector include HSBC (HSBA.L: Quote, Profile, Research), Santander (SAN.MC: Quote, Profile, Research), BNP Paribas, BBVA (BBVA.MC: Quote, Profile, Research), Commerzbank (CBKG.DE: Quote, Profile, Research), National Bank (NBG) (NBGr.AT: Quote, Profile, Research), Bank of Cyprus BOC.CY, Bank of Piraeus (BOPr.AT: Quote, Profile, Research), Marfin Popular Bank (MRBr.AT: Quote, Profile, Research), Aareal Bank (ARLG.DE: Quote, Profile, Research), Allied Irish Banks (ALBK.I: Quote, Profile, Research), DnB NOR (DNBNOR.OL: Quote, Profile, Research) and UBI Banca (UBI.MI: Quote, Profile, Research).

The brokerage, however, said earnings estimates should continue to be downgraded mainly due to higher loan loss charges and that it would avoid banks with meaningful exposure to capital increases and a deteriorating credit cycle.

Keefe Bruyette also said the sector is in the process of raising a tremendous amount of capital, which is needed to withstand the onslaught of structured credit writedowns.

"However, at this stage and with a few exceptions, we do not see a significant need for further large capital increases in the industry," the brokerage added. (Reporting by Bhaswati Mukhopadhyay and Esha Dey in Bangalore; Editing by Himani Sarkar, Bernard Orr)