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* Top 30 EU banks' assets up 530 million euros
* Cost/income ratios improve marginally
* Return on equity up but well below target
* 28 billion euros of loan losses in first half
* Graphic: http://graphics.thomsonreuters.com/14/europeanbanks/index.html
By Laura Noonan
LONDON, Sept 12 (Reuters) - Europe's big banks returned togrowth mode in the first half of this year, expanding theirbooks by 530 million euros ($685 million), in a sign they arestarting to get back on their feet after the financial crisis.
But even though the banks' assets are growing as a result oflending money or doing deals, their profitability remains belowtarget, loan losses are still a burden and many businessesacross Europe still find it tough to borrow cash.
Europe's 30 largest listed banks, battered by the crisis andregulatory demands that followed, shrank their balance sheets by10 percent from 2008 to 2014, shedding about 2 trillion euros ofassets by selling businesses or chunks of loans.
This process has contributed to a squeeze on lending whichhas not helped Europe's weak economies revive growth. TheEuropean Central Bank last week stepped in with a new plan toget more money flowing from banks into the flagging euro zoneeconomy.
"We are on an improving and healing trend across Europe, butthere are degrees of healing," said Vincent Montemaggiore,Boston-based portfolio manager at Fidelity, one of the world'slargest investment houses.
"Generally, in the northern part of Europe you're startingto see some early signs of asset growth and loan growth, and inthe southern part you're still seeing declining assets but at amore moderate pace."
Montemaggiore said he was not expecting bank assets to growvery robustly in either the north or south of the region overthe next couple of years.
Data compiled by Reuters shows the 30 banks - which includethe likes of Deutsche Bank, Bank of Ireland and Santander - added 530 million euros of assets inthe six months to June, taking the total to 23.1 billion euros.
In the first half, the growth rate of 2.2 percent wasflattered by an accounting change as Santander consolidated itsU.S. results, helping the Spanish lender come in as the thirdfastest growing bank with a 54 million euros rise in assets.
The fastest growing was France's Societe Generale,with an increase of 108 million euros as it acquired fullownership of derivatives brokerage Newedge and expanded itsglobal banking and investor solutions business. BNP Paribas followed with an increase of 96 million euros.
MUTED GROWTH
Politicians and regulators have been pushing banks to lendmore, but as Europe struggles to grow and flirts with deflation,or falling prices, the incentives for companies or households toborrow are less. The European Commission expects the EU to growby just 2 percent this year, with economies such as Spain,Germany and France expected to expand more slowly.
The banks themselves are under pressure to hold more capitalto support loan books, deterring them from making new loans.
"Asset growth is expected to remain muted until economiessustainably recover (prompting a rise in demand for credit) anduntil capital (in particular leverage) rules are clarified,"Justin Bisseker, European Banks analyst at Schroders, said.
"We are certainly not in a 'normal growth phase'."
Guy de Blonay, fund manager at Jupiter, said banks must viewany expansion through a profit lens. "They have one point incommon, they are all pushing for improvement in their ROE(return on equity)," he said, referring to a measure of bankprofitability.
"Whether it is buying more businesses or bolting onacquisitions, or by getting rid of non performing or underperforming business (that is the aim)."
De Blonay pointed to Caixabank's recently-announced purchase of Barclays' Spanish retailarm as an example of banks sticking to the areas where theyalready lead, to increase the chances of improving returns.
ROOM FOR IMPROVEMENT
The 25 banks which reported return on equity for the firsthalf of the year managed an average of just 7.1 percent,according to Reuters' data, well below the double-digit figuresthey are aiming for.
The weakest performer, Austria's Erste Bank, had areturn on equity of minus 16.8 percent as a result of unusuallyhigh losses on its eastern European businesses.
"You'd expect below normal RoEs at this point in theinterest rate cycle and at this point in the provisions cycle,"said Montemaggiore. He pointed to the record-low central bankrates which make it harder for banks to make money.
He said profits should naturally improve as bad debts falland banks get better at controlling costs.
In the first-half, the top 30 banks' cost/income ratios, ameasure of what percentage of income goes on costs, improvedmarginally to 58.6 percent from 59.3 percent.
Loan losses remained a problem across the group, wiping 27.7billion euros off their earnings and sucking up 10.5 percent oftheir total income. But they were less of a problem than in thefirst half of 2013, when the tally was 40.2 billion euros, or 15percent of total income.
Bissiker said some banks could enjoy write-backs, clawingback money they had set aside for loan losses, and that whilelitigation losses were a threat, other exceptional losses shouldbe smaller from 2014.
"Tolerance of low RoEs is improved at present as risk-freerates have fallen to generational lows," he said. "Ultimately,however, banks need to generate returns above cost of capital tojustify growth."(1 US dollar = 0.7740 euro) (Additional reporting by Olivia Hardy; editing by Jane Merrimanand David Clarke)
Barclays (BARC)