European banks have $3 trln of exposure to emerging markets

* European banks had $3.4 bln of EM loans at end Sept-BIS

* More than four times the exposure of U.S. banks

* Loans account for about 12 pct of European bank assets

* European bank shares down 7 pct in two weeks

By Steve Slater

LONDON, Feb 3 (Reuters) - European banks have loaned inexcess of $3 trillion to emerging markets, more than four timesU.S. lenders and putting them at greater risk if financialmarket turmoil in countries such as Turkey, Brazil, India andSouth Africa intensifies.

The risk is most acute for six European banks - BBVA, ErsteBank, HSBC, Santander, Standard Chartered, and UniCredit -according to analysts.

But the exposure could be a headache for the industry as awhole, just as it faces a rigorous health-check by the EuropeanCentral Bank, aiming to expose weak points and restore investorconfidence in the wake of the 2008 financial crisis.

"We think EM (emerging markets) shocks are a real concernfor 2014," said Matt Spick, analyst at Deutsche Bank. "Whencurrency (volatility) combines with revenue slowdowns and risingbad debts, we see compounding threats to the exposed banks."

The Deutsche Bank analysts said the six most exposedEuropean banks - which they did not name - had more than $1.7trillion of exposure to developing markets.

In recent weeks, emerging market currencies have come underfire as China's growth slows and the U.S. Federal Reserve windsdown its stimulus programme, with investors selling developingmarket assets in anticipation of higher U.S. interest rates.

In a bid to protect currencies, interest rates have beenhiked in Turkey and elsewhere, but investors remain nervy,especially around the so-called "Fragile Five" economies ofTurkey, Brazil, India, Indonesia and South Africa.

An emerging markets crisis could hit banks in a variety ofways - a collapse in local currency can hurt reported earningsor capital held in the country; loan losses can jump as interestrates rise; or income from capital markets activity or privatebanking can fall.

European banks' exposure varies from country to country.BBVA and UniCredit have big exposure toTurkey, Santander is most exposed to Brazil, whileStandard Chartered and HSBC would be hurt byproblems in India and Indonesia. Barclays, meantime,would be most exposed to South African problems, analysts said.

However, they said the impact of apparently individualproblems, such as inflation in Venezuela or lower growth inIndia, could quickly spread into wider concern among investors,and had already contributed to a 7 percent drop by Europe's bankindex in the last two weeks.

The biggest risk is that a jump in interest rates sparksdefaults on loans, analysts added. Often a credit shock followsor replaces a currency shock, as happened in Argentina in1999-2002.

EXPOSURE

Europe's banks have cut their overseas loans since thefinancial crisis and substantially increased the amount ofcapital they hold, meaning they have a better cushion to absorblosses than in the past.

But they still have about 12 percent of their assets inemerging markets, and about a quarter of their earnings comefrom the region as often the businesses there are "unusuallyprofitable", Deutsche Bank's Spick said.

European banks had $3.4 trillion of loans to developingcountries at the end of September, according to data from theBank for International Settlements.

British banks had a $518 billion exposure to theAsia-Pacific region, Spanish banks had $475 billion of loans toLatin America, and banks in France and Italy each had $200billion of exposure to developing economies in Europe.

Among the most exposed banks, Standard Chartered makes morethan 90 percent of its earnings from Asia, Africa and the MiddleEast, and warned in December that its 10-year record of earningsgrowth would likely end.

BBVA had 41 billion euros ($55 billion) of exposure toMexico - which last year made up 80 percent of group profits -and 52 billion euros of loans to South America.

Santander had 132 billion euros of loans to Latin America atthe end of last year, half of which were in Brazil. Brazilcontributed 23 percent of group earnings last year, and the restof Latin American contributed another 24 percent.

Analysts said emerging market turmoil could also have abroader, indirect impact on revenues in investment banking andwealth management.

"A significant increase in volatility in EM bonds and FX mayresult in volumes drying up and hence a potential for a materialslowdown in EM fixed income revenues," said JPMorgan analystKian Abouhossein.

He estimated the investment banks of HSBC and StandardChartered each generated $2.1-2.2 billion from emerging markets,while Credit Suisse and Deutsche Bank madeabout $1.1 billion each.