Nearly a third of European Union banks being tested for their resilience in bad markets may need some outside support, credit rating agency Moody's said on Wednesday.

The European Banking Authority (EBA) was expected to announce the results of its stress test next week. Analysts expect more failures than the seven recorded last year as regulators seek to boost credibility in the exercise.

Moody's said the overall impact of the stress test on bank ratings will be limited. Of the 91 EU banks subject to the EBA's 2011 stress test, Moody's believes that 26 rated banks have a heightened risk of needing extraordinary external support.

Moody's expects the banks that fail the EBA stress test will be among those lower-rated banks, or among the non-rated banks included in the EBA stress test, it said.

The health check, aimed at restoring investor confidence in a sector hit by the euro zone debt crisis, weaker returns for investors and regulatory uncertainties, should have positive effects for banks, Moody's said.

The test has already prompted several banks to bolster their capital cushions and will give investors details of each lender's exposure to sovereign debt and an insight into regulators' assessment of banks' capital positions.

However, whilst the 2011 stress test is stricter than the 2010 European bank stress test, Moody's notes that the EBA's 2011 stress assumptions do not assume a sovereign default at a time when the risk of a sovereign default within the euro area has increased, the agency said.

The EU has been trying to put together a second bailout for Greece, and Moody's on Tuesday became the first ratings agency to cut Portugal's credit standing to junk.

EU finance ministers will discuss backstops for failing banks next Tuesday when they will be told the test results by the EBA ahead of publication later that week.

(Reporting by Huw Jones; Editing by Dan Lalor)

Portugal