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) 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). 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) 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.

In July, Capital One ( COF) 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) 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), Bank of America ( BAC), Citigroup ( C) and Wells Fargo ( WFC). 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) 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) and Morgan Stanley ( MS) 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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