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European Banks May Pull Back From U.S. Shores

In July, Capital One (COF - Get Report) struck the biggest bank deal of the year when it bought U.S. -based ING Direct for $9 billion after the Dutch banking behemoth ING (ING - Get Report) was forced by the European Union to sell the unit and quicken a return of bailout money taken during the crisis. The combination would make Capital One the fifth largest U.S. bank, cranking up its competition with rivals JPMorgan (JPM - Get Report), Bank of America (BAC - Get Report), Citigroup (C - Get Report) and Wells Fargo (WFC - Get Report). Not to be stopped, Capital One also bought a $30 billion U.S. -based loan portfolio from Britain's HSBC (HBC).

The deals to buy U.S. businesses from recapitalizing European banks are so transformative to Capital One, the U.S. Department of Justice is slowing down its buying spree and may table it entirely. Regardless of the DoJ review, continued capital raising by European banks through U.S. divestitures will be an opportunity for growth hungry lenders like Capital One.

Recently, Italy's Intesa Sanpaolo sold its securities business to State Street for $2.6 billion and Buffalo -based First Niagara (FNFG - Get Report) nearly doubled its asset size by buying 190 U.S. bank branches from HSBC for $1 billion. After giving up on a 2002 purchase of Household, the biggest subprime lender in the U.S. at the time, HSBC is in the midst of unwinding its HSBC Bank U.S.A, which holds $203 billion in assets. The deals are a signal of what's still to come in U.S. asset sales.

That will be especially true if earnings like Rome -based UniCredit's $14.5 billion third quarter loss announced in November - its largest ever - is indicative of a next leg of crisis to come in banks across the Atlantic. To absorb the loss, which was partly attributed to rising Italian bond spreads, UniCredit will shutter its Western European brokerage.

Shares have fallen over 40% this year in a Bloomberg index of 500 European banks and financial services companies, meanwhile spreads to protect the bonds of Europe's largest banks in Italy, France and Spain have increased by roughly the same amount. In October, Standard & Poors downgraded BBVA and Santander's credit ratings, and also those of Spain.

Meanwhile, Spanish news agency Mundo reported that upcoming stress tests could account for a 20% loss on Spanish government bonds, which it calculated would add nearly 50 billion euros in Spanish bank losses. The worry is that with Spanish yields currently over 6%, the level that caused Greece, Ireland and Portugal to seek IMF and eurozone assistance, an escalating crisis is putting previous capital tests in doubt. BBVA recently reported a preliminary capital shortfall of 7 billion euros in new tests and quickly raised 5 billion in a rights issue.

Asset sales are also a time-tested way to rebuild cash, shrink assets and conserve capital.

As European banking titans like HSBC and ING pull from $100 billion plus -sized U.S. operations and others like RBS, Santander and BBVA may be compelled to do so either as a result of bailout mandates or escalating sovereign debt fears, the opportunity for buyers may not be confined to commercial banks.

On Thursday, UBS (UBS) said it will shrink its investment banking operations drastically in a push to cut risk weighted assets by nearly 50% by 2016 to meet new capital requirements. "We have chosen to substantially reduce the risk profile of the bank," said newly appointed Chief Executive Sergio Ermotti about the move to cut investment banking activities and the risk capital needed to support them under Basel III mandates.

For U.S. investment banks like JPMorgan, Goldman Sachs (GS - Get Report) and Morgan Stanley (MS - Get Report) a pullback of investment banking activities to conserve capital by UBS, Credit Suisse (CS) and RBS, among others, may be an opportunity. "You need to shrink the balance sheet, you need to shrink loans," says Bove. Whether that's by a European investment bank or commercial bank with significant U.S. operations Bove adds, "There is tremendous opportunity in picking up European assets."

-- Written by Antoine Gara in New York.

To contact the writer, click here: Antoine Gara.

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