As struggling European banks scale back their worldwide operations, cash-rich Gulf lenders see a chance to expand by snapping up the Middle East assets of European rivals at attractive prices.

After years of building operations in the fast-growing Middle East and North Africa region, European lenders are shrinking back due to a crippling debt crisis at home and the need to raise capital to meet regulatory requirements.

Gulf banks are keen to seize an opportunity as profitable businesses from Turkey to Egypt have been put on the block by European banks at a time when valuations are near multi-year lows due to the volatility in financial markets.

'There is a lot of pressure on the international banks to divest non-core assets and focus on their domestic operations due to the euro zone crisis,' said Jon Breach, Dubai-based chief executive of BDO Corporate Finance Middle East.

'Undoubtedly, for regional banks (in the Gulf) that provides a natural opportunity to consolidate and grow. You can see clear logic for that.'

BNP Paribas, France's biggest listed bank, is planning to sell its retail banking operations in Egypt as it seeks to shore up its capital base and exit non-core operations, two banking sources told Reuters this month.

Piraeus Bank, Greece's fourth-biggest lender, is planning to sell its Egyptian arm and as many as five Middle Eastern institutions have bid for the $200 million stake, sources told Reuters in April.

Piraeus, one of four stricken Greek banks that recently received capital injections to help them overcome the effects of the country's debt crisis, was not immediately available for comment.

Standard Chartered pulled out of the sale process last year citing political instability in the North African country, but Gulf banks remain keen to establish themselves there.

'Most of the Gulf banks have their operations confined to their respective states which have limited opportunities for rapid growth at higher base,' said Joice Mathew, head of research at brokerage United Securities in Muscat.

'Branching out to familiar and neighbouring regions like Egypt, Turkey is a sensible option given the quality of assets being put up for sale by the European lenders. Deposit growth has been on the rise and in the absence of enhanced lending options, it's logical to put that low-cost excess liquidity on acquisitions.'

First-quarter profits of around 20 Gulf banks covered by Kuwait's Global Investment House rose 18 percent year-on-year, thanks to strong balance sheet growth and lower provisioning, according to the brokerage.

Those banks' deposit base grew 6.2 percent in the quarter, Global said, but some banks are seeing much bigger deposit growth, helped by oil-driven inflows.

National Bank of Abu Dhabi saw customer deposits jump 24 percent in the first quarter to 187.7 billion dirhams ($51.1 billion). Qatar National Bank (QNB) whose profits rose 32 percent in 2011, saw a 21 percent increase in customer deposits in the first quarter.

QNB, Qatar's largest lender, was the prime contender to buy Belgian lender Dexia's Turkish arm DenizBank but recently lost out on the deal, worth up to $3.9 billion, to Russia's Sberbank in a highly competitive auction process.

Kuwait's Burgan Bank, the commercial banking arm of Kuwait's biggest investment firm, had more success, reaching a deal in April to buy Greek lender EFG Eurobank's Turkish arm for $355 million.

Burgan bought the stake at book value without any significant premium, signalling pricing may favour the buyer in such deals.

'It is a buyer's market right now and the premise is that emerging markets will continue to grow,' Phil Gandler, regional head of transaction advisory services at consultants Ernst & Young in Riyadh, said. 'If you look at some of the assets being put on the block, they are great assets generating a lot of value.'

Countries such as Turkey, which targets 4 percent economic growth this year despite the global slowdown, are seen as more resilient to economic woes in neighbouring European countries but gaining a banking license there is extremely difficult, leaving acquisitions as the only way to establish a presence.

'We see a lot of interest for Turkish assets. Given all the issues in Europe, it's the perfect proxy for Gulf banks seeking growth opportunities,' said a senior Dubai-based banker speaking on condition of anonymity.

QNB, which has embarked on an aggressive expansion strategy recently, may be eyeing BNP's Egyptian retail operations, one banking source said, adding any talks are likely to be in the initial stages. QNB was not available for comment.

In April, QNB agreed to increase its stake in Iraq's Mansour Bank to 51 percent from 23 percent. It also acquired a 49 percent stake in Libya's Bank of Commerce and Development as part of its expansion plan.

While Gulf lenders have been keen to expand their regional operations, building scale has never been easy. Inter-regional bank mergers don't happen a lot because major shareholders - often powerful local families - are reluctant to cede control and often want unrealistic valuations, analysts say.

Markets such as the United Arab Emirates are significantly overbanked with 51 financial institutions in the UAE - 23 local and 28 foreign lenders - in a country of five million people, encouraging many banks to look beyond their domestic turf for higher profit growth.

Qatar has 18 banks despite the largest player having a more than 20 percent market share. Foreign banks have beefed up their presence in the region and taken away lucrative investment banking business, adding to the challenge facing smaller local players.

'I think banks in the region, whether they are commercial or investment banks, are due for consolidation and need to build scale. However, you don't see that happening in the Gulf in any big way,' Gandler said.

Several bank mergers have been called off in the past, including a union of Qatar's Al Khaliji Commercial Bank and International Bank of Qatar (IBQ), which fell through last year after the banks failed to agree terms.

Bahrain Islamic Bank and Al Salam Bank ended merger talks in February because of disagreement over valuations. Mergers that have taken place have tended to have been forced by government.

The Dubai government ordered Emirates Bank and National Bank of Dubai to join in 2007, and the combined entity, Emirates NBD , is now absorbing Dubai Bank, a debt-laden Islamic lender, at the behest of UAE authorities. - Reuters