By Dominic Lau
LONDON, Nov 3 (Reuters) - European bank shares fell sharply on Tuesday, hitting a more than two-month low, as poor results from UBS and European Commission estimates of bank losses renewed concerns over the sector's health.
A shake-up of British banks Royal Bank of Scotland and Lloyds Banking Group also raised questions about the sector, after CIT Group, a U.S. lender to hundreds of thousands of small- and medium-sized businesses, filed for bankruptcy on Sunday.
UBS sank 6.5 percent, hitting a more than two-month low, as the bank said it did not expect a recovery of client inflows any time soon and higher-than-expected accounting charges pushed it into its fourth consecutive quarterly loss.
The Swiss bank reported outflows of 36.6 billion Swiss francs ($35.81 billion) at its key wealth and asset management divisions.
Meanwhile, the European Commission said results of stress tests in the banking sector showed losses could amount to 400 billion euros ($590.9 billion) in 2009-2010.
The news weighed on other major European banks, with HSBC, Deutsche Bank, BNP Paribas, Societe Generale, Banco Santander and Credit Suisse down between 3.1 percent and 5.5 percent.
The DJ STOXX European bank index lost 3.3 percent, hovering near a two-month low and making it one of the top losing sectors within the DJ STOXX 600 index, down 1.9 percent.
The banking sector has been the best performer in Europe since the market rallied from a floor in early March, up nearly 150 percent on expectations that the global economic recovery was gathering pace. That compared with a 50 percent rise in the benchmark DJ STOXX 600 over the same period.
"In the balance between the ongoing write-offs or asset impairments against the strong operating earnings, the market got worried about write-downs in the pipeline," said Bert Jansen, European equity strategist at Exane BNP Paribas in Paris.
Denmark's biggest bank Danske Bank reported on Tuesday loan writedowns above analysts' forecasts and said writedowns would stay high in the fourth quarter.
Its shares sagged more than 6 percent.
"Another worry is that monetary policy may be on the eve of normalising again. You have some small countries like New Zealand and Norway that have indicated or have already started to tighten monetary policy," Jansen said.
In the UK, Royal Bank of Scotland lost 2.7 percent after it said it would join the government's asset protection scheme (APS), designed to insurer riskier loans. But it would pay fees for its membership annually rather than via a single up-front fee of 6.5 billion pounds ($10.63 billion).
Lloyds shares, however, advanced 2.2 percent, with investors relieved that a record 13.5 billion pounds rights issue would allow the bank to stay out of the APS.
"There were no major surprises and, at the first look, people are happier with the structure of Lloyds, which is not taking part in the insurance scheme, than that of RBS which is," said Rupert Armitage, director at Shore Capital in London.
By comparison, progress had been slow in Ireland's bank sector restructuring, traders said, dragging Allied Irish Bank down more than 12 percent and Bank of Ireland down 9.2 percent.
"Any bank that has any exposure particularly to retail and small business is having a terrible time at the moment, and the dangers are palpable and real and could have a much more serious effect in the future," said David Morrison, market strategist at GFT Global in London. ($1=.6769 euros) ($1=.6115 pounds) ($1=1.022 Swiss Franc) (Additional reporting by Simon Falush and Jon Hopkins in London, and Padraic Halpin in Dublin; Editing by Mike Nesbit)