* Banks need to boost capital to handle risks
* Average tier 1 ratio rises by mid-year vs end-2012
* Leverage ratios better than peers (Releads on stress test comments, adds quotes from news conference, background)
By Michael Shields and Georgina Prodhan
VIENNA, Dec 11 Six Austrian banks will hold up well in European stress tests next year that are designed to gauge whether the region's banks can withstand tough market conditions, the Austrian National Bank (OeNB) said on Wednesday.
OeNB Governor Ewald Nowotny gave an upbeat view of how domestic banks would fare in the stress tests that aim to reassure investors about the resilience of 128 big euro zone banks in the wake of the financial crisis.
"We cannot now predict the results but we are confident that the Austrian banks will hold up well," he told reporters.
The central bank noted that Austria's banking sector had boosted its average capital strength but had room to do more. The bank also warned Austria's lenders not to over-extend themselves in fast-growing emerging markets like Russia and Turkey which could lead to losses if these economies slow down.
"In the light of rapid credit growth in countries like Russia and Turkey, Austrian banks should heed the lessons of past boom phases and proceed with due caution and a focus on risk management," it said, noting that Austrian bank units in those countries had boosted loans by two-thirds since the end of 2009.
The bank's biannual financial stability report highlighted the risks of concentrating on a small number of countries in central, eastern and southeastern Europe (CESEE) to generate profits and urged lenders to improve capital ratios more.
"A further build-up of capital is still warranted in the OeNB's view given the risk structure of exposure (in CESEE) higher market expectations for regulatory demands, the better capitalisation of peer banks and the need to pay back state aid," it said.
The six Austrian lenders to come under direct ECB supervision next year are: BAWAG PSK ; Erste Group Bank ; Raiffeisen Zentralbank and its two big shareholders Raiffeisenlandesbank Niederoesterreich-Wien and Raiffeisenlandesbank Oberoesterreich ; and the Volksbanken group.
JUST ENOUGH IS TOO LITLE
The OeNB said the banking sector's average Tier 1 capital ratio - a measure of financial health - had risen to 11.5 percent of risk-weighted assets by mid-2013, up half a point from the end of 2012. The sector's leverage ratio improved to 6.4 percent, better than international peers. The leverage ratio measures the amount of capital a bank holds as a percentage of its assets without adjustments for risk.
But big Austrian banks still lagged behind European rivals in terms of capital. The gap between Tier 1 ratios at Austria's top three banks and peers in Europe had widened, it said.
Austria's banks have plugged an 8 billion euro ($11 billion) capital hole that the OeNB had identified in July as what was needed to meet minimum international standards by 2022, OeNB banking supervision head Andreas Ittner told reporters.
But he said: "Minimum capital is too little. The markets expect other ratios, and that is the point." He said banks had to match international peers' strength if they wanted to grow.
The OeNB described the banking sector, which includes the biggest lenders to emerging Europe, as stable with the exception of known problem cases.
These include nationalised Hypo Alpe Adria, which has been heavily dependent on state aid, including an extra 800 million euro injection to be approved on Friday.
Nowotny would not discuss how best to handle Hypo, which had to be rescued in 2009 after a decade of unbridled expansion fuelled by guarantees from its home province of Carinthia. He reiterated only that talk of letting the bank go bust was unfounded.
($1 = 0.7261 euros) (Editing by David Holmes and Jane Merriman)