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UPDATE 1-RLPC-Santander is selling 2.5 bln euro loan portfolio

Thursday, 4 Oct 2012 | 1:34 PM ET

* Spanish banks selling 4 billion euros of loans

* BoAML buying 2.5 bln euro loan portfolio from Santander

* Bankia prepares 500 mln euro loan sale

(Adds quotes, loan portfolio details, background)

By Claire Ruckin and Owen Sanderson

LONDON, Oct 4 (Reuters) - Spain's Banco Santander is selling a loan portfolio of up to 2.5 billion euros ($3.23 billion) to Bank of America Merrill Lynch , banking sources said on Thursday.

Santander's deal will be the biggest single loan portfolio sale by a Spanish bank since the euro zone crisis intensified, the sources said.

Another Spanish bank Bankia is preparing to sell a 500 million euro in loans, the banking sources said.

Santander, Bank of America Merrill Lynch and Bankia declined to comment.

Spanish banks have been considering selling loans since late 2011 but loan sales have picked up after Spain's bank and public sector finances came under renewed pressure in mid-2012.

The Spanish government is expected to request an international rescue package by the end of the year to lower its borrowing costs.

"Spanish banks have been looking at portfolio sales for some time - it is not surprising that they have upped their pace now," a banker said.

BBVA has already sold around 1 billion euros of loans on an individual basis this year, banking sources added. BBVA, which is strongly capitalised, has nearly met its loan sale target, a senior banker said.

Some other Spanish banks are under pressure to plug a 60 billion euro capital shortfall, according to consultants Oliver Wyman in a report released last Friday.

Some have been hit hard by the country's property crash and the euro zone crisis and are focused on raising capital.

Santander does not have a capital shortfall. The bank's core Tier 1 capital, a measure of financial strength, was 10.1 percent at the end of the second quarter by Basel criteria and 9.5 percent according to the European Banking Authority.

DISTRESSED DEBT

Bank of America Merrill Lynch won the Santander deal against competition from private equity funds and distressed debt investors, bankers said.

The loans consists of performing and non-performing loans to small and medium-sized companies, real estate loans, distressed loans and loans to companies that no longer fit the bank's strategy, bankers said.

The U.S. bank has a large sales force and is able to sell the loans to a wide range of investors including European and U.S. buyers.

Earlier this year, the U.S. bank bought a 300 million euro-equivalent portfolio of loans from Allied Irish Bank

Santander took a loss to sell the portfolio, traders said, but the sale of the loans in a bundle allowed it to achieve a better price overall than it would have done by selling loans individually.

Another banker said Santander did not need to sell many more loans.

PORTFOLIO SALES

Spain's banks are relative latecomers to loan portfolio sales, which have raised hundreds of billions of euros for Europe's cash-strapped banking sector.

An estimated 3 trillion euros of loans were expected to be put up for sale after regulators stepped up pressure on banks to strengthen their capital buffers in mid 2011.

Most banks chose to sell loans or let them run down to free up capital rather than raise expensive equity. By selling off loans they cut down the amount of capital they have to hold to support the loans. This also boosts their capacity to take on new business.

UK banks rescued after the financial crisis held the first loan portfolio sales in 2010 and were followed by banks from Europe's periphery. Portuguese, Greek and Irish banks offloaded loans in early 2011 as the eurozone crisis hammered their funding costs.

The loan sales turned into a flood after August 2011 when Greece's finances deteriorated and French and German banks were forced to sell loans in the face of soaring funding costs and a dollar squeeze which made it uneconomic to hold low-priced loans.

BNP Paribas and Societe Generale sold a combined 150 billion euros of loans (risk-weighted assets) as an alternative to raising capital in late 2011.

At the same time, Italy's UniCredit said it would sell or run off 48 billion euros of loans.

($1 = 0.7751 euros)

(Additional reporting by Tessa Walsh. Editing by Tessa Walsh and Jane Merriman)

((tessa.walsh@thomsonreuters.com)(+44 207 542 4048)(Reuters Messaging: tessa.walsh.thomsonreuters.com@reuters.net))

Keywords: SANTANDER LOANS/