Investors have spent around $35.5 billion buying new shares to strengthen European banks this year, more than they raised by mid-July in any year since 2008, Thomson Reuters data shows.

That leaves investors badly exposed if a European Central Bank (ECB) review of their assets and subsequent stress tests reveal any shocks.

Litigation costs, relating to issues as diverse as foreign exchange trading and potential flouting of U.S. trade sanctions, remain other major negatives, helping leave Europe's bank sector down 1 percent this year, compared with an 11 percent rise in the broader market.

European banks still face about $50 billion of potential conduct costs, or 40 percent of their total potential bill by 2016, and are less well provisioned for litigation than their U.S. peers, analysts at Morgan Stanley estimated.

"The big issue is that any cash call is probably going to be used to pay off yet another fine (from) ... one government or another, most likely the U.S.," said Lex van Dam, a hedge fund manager at Hampstead Capital.

"That combined with a stall-speed European economy and questionable asset quality makes European banks an investment that is hard to properly analyse and thus to invest in."

EU banks will be told in late October if they have to raise more capital to increase the provisions set aside for loans already gone bad, or buffer themselves against future crises.

Regulators want to avoid banks painting an overly optimistic picture of their health and being forced to come back weeks later cap in hand.

Banco Espirito Santo (BES), Portugal's largest listed lender, rattled markets last week, underlining how fragile investor sentiment towards the euro zone still is.

SLUGGISH REVENUE

At the same time, revenue growth is sluggish, investment banking revenues are set to be weak for a fourth consecutive quarter, and regulators are keeping banks on their toes about matters such as leverage ratios and risk-weightings, which also affect how much capital they need to hold.

Investors have pumped capital into banks across Europe, much of it into banks and countries shunned as too risky during the financial crisis. But some investors expect to be called on again.

Bumper cash calls such as those by Deutsche Bank and Barclays are not expected to be needed ahead of the asset review results, but smaller names may continue to emerge.

Austria's Erste Bank, which has said it remains adequately capitalised, faces a record loss due to problems in Hungary and a harder line being taken by regulators in Romania on loans ahead of the asset quality review.

German cooperative lender Muenchener Hypothekenbank said this week its capital fell short of the ECB's requirements, but it had plugged the hole with an extra 400 million euros from its owners.

The ECB's review of the euro zone's 128 largest banks requires lenders to show a capital ratio of at least 8 percent, based on their balance sheets at the end of 2013.

Some banks may take extra provisions for potential fines, after the $9 billion penalty heaped on BNP Paribas by U.S. authorities for sanctions breaches, nine times what the bank provisioned for in February, and signalled penalties are rising.

Investment banks also face a grim second quarter for revenue, hit by subdued client activity, low interest rates and by shrinking and restructuring of their businesses. Rates and foreign exchange revenues are expected to be particularly weak, offset by better equities and advisory income.

Global investment bank revenues are likely to fall 8 percent from a year ago and drop 13 percent from the first quarter, according to Kian Abouhossein, analyst at JPMorgan. Investment bank revenues at Citi, JPMorgan and Goldman Sachs fell 10 percent on average from a year ago.

Susan Sternglass Noble, who runs the AXA Framlington Financial Fund, said she had invested in some bank stocks as "extreme value plays, but with markets up, you’re not getting them at a distressed price and so they’re a less compelling story.

"The bank issuance went well as long as everyone was piling in to a consensus banks trade," she added. "But many equity managers have become more cautious after being satiated on deals."

(Additional reporting by Steve Slater and Freya Berry; Editing by Carmel Crimmins and David Holmes)

By Laura Noonan and Simon Jessop