Higher-than-expected profits from Barclays and Commerzbank failed to dispel concerns over the underlying health of Europe's top banks on Thursday.

Fund managers and traders said the banks' higher profits were principally due to accounting methods, which had enabled them to book lower bad debt charges and claim one-off gains, rather than any improvement in their underlying businesses.

We are a bit skeptical and we've started to sell some of our banking shares, said Christophe Gautier from Paris-based GSD Gestion, which manages around 100 million euros ($131.2 million) in assets.

Earnings at the investment arm of Barclays, Europe's sixth biggest bank, fell nearly 15 percent in the second quarter, although more commonly income in the industry has dropped by about a third in the fallout from the euro-zone debt crisis.

Reassuring stress test results and a delay to the Basel III set of tough new banking rules helped the DJ Stoxx European bank sector <.SX7P> rise some 30 percent from June to July.

The index, however, has drifted back down from above 230 points since early August, despite a week of bumper profits from the likes of HSBC and BNP Paribas .

Barclays shares were down some 3 percent despite posting a forecast-beating 44 percent rise in interim profits, while Commerzbank's profits failed to breathe life into its flat stock price.

Although banks showed good results, the market is well aware of opaque accounting practices, window dressing, and their books are still full of bad loans, which shows up in the lackluster trading, said a Geneva-based trader.

JITTERS REMAIN

Barclays, Europe's sixth-biggest bank by market capitalization, said its bad debts fell 32 percent to 3.08 billion pounds. Commerzbank, in which the German government owns a 25 percent stake, now expects risk provisions of up to 3 billion euros in 2010, down from an earlier estimate of 3.8 billion euros.

State-supported Belgian bank KBC also benefited from reduced bad debt provisions as it posted a 35 percent gain in its underlying second quarter net profit.

However, Barclays' exposure to Spanish bad debts remains a worry for investors. The UK bank, which didn't need bailing out during the financial crisis, had a 433 million pound jump in losses on corporate loans in Spain.

British fund management company Schroders said it expected financial markets to remain volatile in the coming months amid the ongoing economic uncertainty, and investors said banking shares might not be able to continue their recent rally.

Clearly the banking sector is gaining in momentum and it has been helped by the delay of Basel III, said Cedric Ozazman, an investment advisor Swiss financial services firm Reyl.

But I don't think the outperformance will last for a long time and I think the sector will move back in line with the market, added Ozazman, whose company manages 4 billion Swiss francs ($3.80 billion) in assets and holds Santander and BNP Paribas shares.

($1=.7620 Euro)

($1=1.052 Swiss Franc)

(Writing by Sudip Kar-Gupta; editing by Elaine Hardcastle)

United kingdom Barclays BNP Paribas Commerzbank