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American Banks Actually Are Lending Again—to Europe

Wednesday, 21 Nov 2012 | 1:54 PM ET

American banks having a hard time finding credit-worthy customers near home are finding more business in an unlikely spot — Europe.

At a time when credit problems in Greece, Spain and elsewhere on the continent are dominating headlines, U.S. lenders have been able to capitalize on the crisis by taking business away from European banks.

Bank lending may seem sparse in the U.S., but that's largely a matter of perception. Bank lending is actually on the rise, but only to borrowers with nearly spotless qualifications.

In Europe, meanwhile, lending standards are tightening while credit conditions are worsening, according to the most recent bank lending survey from the European Central Bank. Worsening economic conditions have put pressure on banks there while opening opportunities for well-capitalized institutions in the U.S., where the economy is managing to eke out at least slow growth.

"In all, this suggests that the ECB is still struggling to ease financial conditions as business cycle dynamics remain very adverse," economist at Nomura Securities said in a note. "The ongoing tightness in credit conditions in some euro-area countries remains the biggest challenge for the ECB."

Recent numbers show that American lenders have taken their largest-ever share of lending to European customers, a direct outgrowth of retrenchment from banks in financially troubled nations having to rein in their businesses to weather the sovereign debt storm.

U.S.-originated loans to European customers have totaled about $25 billion in 2012, which is nearly 5 percent of Europe's total loan volume and triple the share from the same period last year, according to Dealogic. (Read More: Merkel Sees Chance for Greek Deal on Monday)

So while the debt crisis and the ensuing European recession remain a significant threat to the global economy, U.S. banks at least have been able to find some ways to capitalize.

"We certainly see some market-share pick-up for U.S. banks from European lenders," said Fred Cannon, industry analyst for Keefe, Bruyette & Woods. "From a business standpoint we've seen some benefits."

Refinancing has accounted for 69 percent of the new business, while corporate lending also has taken a significant share.

Wells Fargo, in particular, has been able to bolster its business by buying loan portfolios from some French banks, which along with their European peers have been forced to scale back to comply with worsening credit conditions and tighter capital regulations.

Deutsche Bank's American operation leads in market share of U.S.-marketed European loans, with a 9.6 percent share, followed by JPMorgan Chase and Bank of America Merrill Lynch, according to Dealogic.

"We still have two issues: The economies of Europe are softening up, so that has a dampening effect on trade in the world economy. The other issue is the banks over there are still not terribly well-capitalized given the weakening economic picture," Cannon said. "As a result, we do think the European banks will continue to scale back their operations in the U.S., offering some opportunities."

American banks have been vilified since the 2008 financial crisis, in which lenders overdosed on risky low-grade mortgages, which were packaged into securities that eventually blew up and led to failures and government bailouts of some of Wall Street's biggest names. (Read More: Fund Manager Charged in $250 Million Insider Scheme)

Since then regulators have clamped down, forcing banks to keep more cash on hand and tighten lending standards.

Lending actually has been on a gentle rise lately, increasing 0.7 percent on an annualized basis in the third quarter. That represented slower growth, though, as the second quarter increased 1.5 percent, according to KBW.

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However, lending has been concentrated among those with sterling credit, with the lesser-qualified — and arguably needier — borrowers still having a tougher time getting access to all the cheap money floating around. (Read More: Bernanke: No New Stimulus Despite Weak Recovery)

U.S. banks have provided 39 percent of the world's investment-grade loan volume this year, the highest percentage since 2006, according to Dealogic.

Total consumer credit, meanwhile, increased 5 percent in September, the latest Federal Reserve data show. The downside: Non-performing — delinquent — loans surged 13.3 percent in the third quarter after falling 10.6 percent in the previous three months.

So despite the boost from Europe, U.S. banks still face the challenge of a weakening environment at home as well as from a Fed-imposed zero-interest-rate structure that will make growth difficult.

"The real challenge for banks is making money in this interest rate environment," Cannon said. "Return on capital is depressed from a historical standpoint and will likely remain so given where the yield curve is."

—By Jeff Cox, CNBC.com senior writer

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