Analysis: Spanish banks, whose home market has been hit by the worst economic downturn the country has seen in decades, are looking to the UK for some audacious acquisitions to expand their financial empires.

Spanish banks, whose home market has been hit by the worst economic downturn the country has seen in decades, are looking to the UK for some audacious acquisitions to expand their financial empires.

Observers believe that many lenders could now be the target of bargain hunters, and that consolidation is set to sweep the sector.

Banco Santander Central Hispano, which already owns Abbey National, the former building society, is among the modern-day Conquistadors, swooping on Alliance & Leicester with a £1.3bn, all-share offer that the ailing high street bank could not turn down.

And last week, the City was awash with rumours that Banco Bilbao Vizcaya Argentaria, better known as BBVA, is running its slide rule over HBOS, the Edinburgh-based financial group that combines Bank of Scotland with the Halifax.

The news, which broke on Wednesday, sent HBOS shares surging by nearly 17%, or 44p, to 305p. The stock was the biggest riser on the London market's FTSE-100 index that day. The shares closed Friday's session 8.75p higher at 310.25p.

HBOS failed to persuade investors to buy new shares at 275p and made a humiliating admission that the bulk of its issue has been left in the hands of underwriters.

UK banks are attractive takeover targets because their shares are cheap, having been hit hard in recent weeks over concerns about write-downs and the stability of US mortgage companies Freddie Mac and Fannie Mae. Moreover, the UK government has an open-door policy to foreign takeovers of UK companies. That is not the case in many parts of the European Union, where key assets are protected from foreign predators. BBVA's 6.4bn bid for Banca Nazionale del Lavoro in 2005 ran into huge obstacles put up by angry BNL shareholders, the Bank of Italy and the Italian government. BBVA later dropped the offer and turned towards acquisitions in the booming Chinese market and the Americas.

"We will see transactions in (UK) sectors that are typically being hit hard by the crunch," said Robert Donaldson, head of M&A at Baker Tilly Financial Services in London. There will be activity in "sectors such as financials and property, retail, media and leisure where the fear factor has hit the valuations," he said. City analysts said Spanish banks have some tough dealmakers who want to make their companies big players in the European financial sector.

One of them is Emilio Botin, chairman of Santander, who has built a reputation as a wily negotiator after a string of bold takeovers - the most recent of which is Alliance & Leicester.

Santander's shopping list is unlikely to end with Alliance & Leicester and asset sales could be used to finance more acquisitions.

The bank may decide to sell its asset management and insurance divisions for around 6bn (£4.8bn).

While other global banks are selling assets to shore up their balance sheets in the wake of the sub-prime rout, the possible Santander sales are being seen as raising cash to finance growth.

"If the sales of the asset management and insurance businesses go ahead, Santander will definitely use the money to buy something," said Jagoba Garcia, an analyst at broker Fox-Pitt.

"It really has no capital restrictions nor is it in need of liquidity."

Santander had no direct exposure to US sub-prime mortgages, unlike major UK banks, and has a reputation for being one of the world's best-managed banks by maintaining an aggressive but choosy acquisitions policy.

The Spanish economy has been cooling significantly since last summer, driven by a slump in the property market yet both Santander and BBVA have been outperforming the wider European banking sector.

Santander has been benefiting from growth in its Brazilian business and BBVA's earnings have been boosted by its business in Mexico.

Santander has also gained from the Bank of Spain's much more conservative approach to capital levels than anything imposed by the Financial Services Authority - the City watchdog.

BBVA releases its earnings for the first half of 2008 today, and analyst Alejandro Ruyra of Landsbank-Kepler in Madrid is expecting it to post a 7.7% increase in net profits for the period, excluding one-offs.

Santander is expected to do even better when it reports earnings on July 29, posting around an 18% increase in net profits, excluding one-offs, driven by Latin-American growth and the impact of further cost-cutting measures at Abbey National.