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European Banks May Pull Back From U.S. Shores

NEW YORK ( TheStreet) -- The European debt crisis and a new round of bank stress tests may force some some large U.S. retail banking names back into the hands of domestic players.

Big regional U.S. players such as Sovereign Bank, Compass Bancshares and Citizens could return quickly to U.S. ownership as their European parents sell off assets to weather a worsening debt crisis and regulators force a speedier return of bailout money.

"It's not going to happen, it's happening now," says bank analyst Dick Bove of Rochdale Securities about U.S. asset sales by European lenders.

All three U.S. banks hold over $60 billion in assets and smaller deals may also be on the table as Europe's once U.S. hungry banks like Banco Santander (STD), Banco Bilbao Vizcaya Argentaria (BBVA) and the Royal Bank of Scotland (RBS - Get Report) forced to return home.

Banks like Santander and BBVA of Spain tested in July's stress tests among the best capitalized lenders on the continent, but could see capital ratios fall if Italian and Spanish yields that spiked to levels above 6%, records since creation of the common European currency, are accounted for.

Prior to the crisis, Santander and others took multibillion dollar stakes in U.S. banks and those headquartered outside of Europe. Santander's biggest deals were a purchase of Philadelphia-based Sovereign Bank and Brazil's Banco Real, the latter was part of a blockbuster $100 billion sale of Netherlands -based ABN Amro in 2007.

Both acquisitions have been a key to Santander's Brazilian and U.S. units, which earn nearly 50% of overall profits. During the crisis, Santander also picked up Bradford & Bingley and Alliance & Leicester in England and Poland's Bank Zachodni. With rising Spanish and Italian bond yields and a potential for upward loss assumptions to new stress tests, Santander may become a seller.

In 2009, Santander IPO'ed its Brazilian operations raising $8 billion in much needed capital in the eight biggest public offering globally since the crisis according to Bloomberg data. As the bank crisis again escalates, RBS bank analyst Raoul Leonard wrote to TheStreet, "what Santander therefore has to do is to keep selling entire businesses or minority stakes."

For Santander, the issue is what to divest? In July 2011, it tabled an IPO of its British operations as a result of "uncertainties" over timing -- its UK and European operations have struggled this year. Profits in its UK bank have slumped 12% and non-performing loans in its Spanish business have risen 21% in the first nine months of 2011.

After the UK IPO cancellation, rumors circulated that Spain's largest lender would sell its Sovereign unit to M&T (MTB - Get Report). While sale talks of the unit, which holds $76.1 billion in U.S. assets and was bought in 2008 for $1.9 billion are "dead" according to Wall Street Journal reports in September, it's still a signal of U.S. asset sales that may soon come.

About how to resolve the issue's faced by Spain's Santander and BBVA as yields spike and a worsening crisis looms, Bove of Rochdale Securities says, "they are likely to pull back in the United States." For Santander that might mean a Sovereign sale and for BBVA it might mean a divestiture of Alabama -based Compass Bancshares, which it bought for $9.6 billion in 2007.

Spanish banks won't be alone in selling U.S. assets - says Bove, "I think that Royal Bank of Scotland's (RBS - Get Report) whole portfolio in the U.S is vulnerable to a sale," referring to its $107.6 billion in assets at Rhode Island -based Citizens Bank. The potential deals would just continue a trend thats already underway.
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