Banks, utilities seen bearing brunt of Greek vote jitters

* Indirect spillover from bonds in focus

* Banks threatened via their portfolios

* Stock prices, capital buffers at risk

* Utilities also exposed

By Alistair Smout

LONDON, July 2 (Reuters) - Europe's stock market has shown few signs of panic ahead of a referendum this weekend that may decide Greece's future in Europe. But investors in bank and utilities stocks should prepare for a bumpy road ahead.

While Greece does not loom large on Europe's corporate radar in terms of direct exposure, any post-vote indirect spillover from credit markets is expected to knock banks via their bond portfolios - especially those holding Southern European debt. Bond-like utility stocks are also vulnerable to rising yields.

UBS (NYSEArca: FBGX - news) estimates that for every one basis-point increase in the spread between peripheral euro government debt and the German Bund, the price of financials suffers a fall of around eight basis points. This outsized impact has already been seen in recent weeks as Greek headlines spur price swings in banks.

"I would definitely avoid bank and utilities heading into the weekend," said Ramin Nakisa, global multi-asset strategist at UBS. "There's a very real risk that we could see the vote go the wrong way, and while the probability of that is low, it would have a very significant effect on those sectors."

So far this week, peripheral spreads have widened some 26 basis points while euro-zone banks have fallen by around 4.9 percent.

CAPITAL RISKS

Bond moves may have consequences for banks' levels of loss-absorbing capital, as the Bank for International Settlement warned earlier this week.

Analysts at JP Morgan estimate that the effect of unhedged moves in sovereign bond yields put banks' core capital ratios at risk, hitting the likes of Italy's Monte dei Paschi (Milan: BMPS.MI - news) , Intesa Sanpaolo (Swiss: ISP.SW - news) , UniCredit (Milan: UCG.MI - news) the most in their base case scenario of a "yes" vote in Sunday's referendum.

However, for the "stress case" of a Greek exit, the impact would mean an extra 102 basis-point hit to capital ratios.

Utilities have also suffered from even the modest rise in yields this week, down 2.9 percent for the week despite a strong rally on Thursday. Utilities tend to have high debt levels and are exposed to interest-rate risk.

To be sure, a Grexit is by no means an obvious outcome. Neither JPMorgan nor UBS expect Greece to exit the euro zone. A more positive than expected outcome to the vote may benefit, rather than harm, bank stocks.

But with so much riding on the European Central Bank's ability to contain contagion, financial stocks remain exposed.

"The contagion aspect is the most important, and that depends a lot on ECB policy," said UBS' Nakisa. "If the policy response is weak, the risk is that there could be full-blown contagion. But we put the probability of that as fairly low." (Reporting by Alistair Smout; Editing by Mark Heinrich)