European banks' risky oil loans make investors edgy

* Slumping oil price may trigger losses, erode capital

* Large repayment milestones a few quarters away

* ING, StanChart, French lenders seen most at risk

By Danilo Masoni and Alistair Smout

MILAN/LONDON, Feb 17 (Reuters) - Investors are growingincreasingly anxious about the exposure of European banks to theoil sector, as a past credit binge threatens to lead to loanlosses that could be worth up to $18 billion.

Major banks ranging from ING to HSBC andDeutsche Bank put big bets on oil when record crudeprices made even the most hazardous project look economicallyviable. But over the past year and a half, oil has slumped tonear 12-year lows, spreading pain across financial markets.

Now with some energy projects facing the threat of beingshut down, banks may see the pain turning into losses or eatinginto their capital strength.

The problem does not look confined to North America, whereenergy exposure is greater and big banks such as Citigroup and Bank of America have already disclosed billions inprovisions.

"Investor concerns have turned to Europe," said MichelePedroni, fund manager at SYZ Asset Management in Geneva. "Theproblem could be painful, but even if there is limitedvisibility for now it seems to be manageable."

Owners of European bank shares - already battered by otherworries, such as negative interest rates - will be watching asthe deadline for big loan repayments approach. Persistently lowoil prices could also worsen oil firms' creditworthiness.

Strategists at BNP Paribas estimate European banks have acombined 400 billion euros ($445 billion) of loans to the energysector. A fifth are rated as high yield, possibly resulting in 6billion euros of losses through defaults.

A surge in the cost of credit protection, through creditdefault swaps, could also force banks to "mark to market" -write down the value of the debt - potentially leading to higherprovisions for non-performing loans, the BNP Paribas team said.

European banking stocks have fallen 20 percent thisyear, nearly twice as much the broader market, on fears aboutslowing economic growth and record-low interest rates, as wellas concern over cheap oil.

"Valuations in many cases reflect risks from the energy andcommodity complex," said Morgan Stanley. It urged caution onStandard Chartered, DNB, Credit Agricole, Natixis, ING and ABN, with oil'sdecline potentially cutting capital levels as much as 175 basispoints.

The oil price slump has added to concern over low inflation,prompting the European Central Bank to cut rates, which in turnis putting more pressure on bank margins.

Fund managers such as Veronika Pechlaner at Ashburton andEnrico Vaccari at Consultinvest said focusing only on oilexposure offers only a partial view of the ugly context in whichEuropean banks are operating. But more disclosure over theirenergy loan book would be welcome, they said.

Lenders in Europe have been less systematic than their U.S.peers in announcing provisions, analyst and investors said.

ING said in February it had 4.8 billion euros of directexposure to oil firms, less than 1 percent of its customerloans, providing some reassurance that the risks weremanageable.

Natixis last week took no oil-related provision for the lastquarter but forecast potential losses worth $250 million inworst-case stress tests. BNP Paribas also indicated no furtherprovisioning was needed.

It will probably take time to figure out the extent of thedamage.

Bernstein analysts Nick Green and Johan De Mulder say crunchtime is still a few months away. Payments due on high-yield debtwill peak above $11 billion in the second and fourth quarter of2017 and at $8 billion in the second quarter of 2016. Theyestimate losses at European and UK banks of $13 billion and $5billion respectively on their high-yield energy loans.

"Low oil prices aren't going away, and the risk is thatwe'll have  a slow burn of revelations and it will take a whilefor the full picture to emerge," IG strategist Chris Westonsaid.

($1 = 0.8988 euros) (Reporting by Danilo Masoni; Editing by Sudip Kar-Gupta, LarryKing)