ANALYSIS: Europe's banks take shape

By Steve Slater

LONDON (Reuters) - Duller, leaner, meaner. Not a new Olympic motto, but the likely shape of banks by 2012 as lenders meet the economic storm by shrinking balance sheets, cutting risks and going back to basics.

Banks in Europe and elsewhere will look far different in two or three years when they emerge from what many economists and bankers are predicting will be the worst economic downturn for 80 years.

Many banks will be happy to just survive. Others, like HSBC (HSBA.L) and Santander (SAN.MC), expect to widen their advantage over rivals. All will have to adapt to a much changed landscape, some radically.

"All banks that have been focusing on expanding their wholesale banking balance sheets will have to do the reverse and shrink those substantially," said Arturo De Frias, analyst at Dresdner Kleinwort.

Wall Street's top investment banks have collapsed or transformed into commercial banks, and European peers are in turn retreating from trouble spots by cutting gambling with their own money and pulling back from the complex products that got them into trouble.

A massive deleveraging is underway and may take several years, and result in a big tilt back towards stable retail banking operations.

"Banks will have to focus on their core competencies and what they really do well and stop trying to make money out of everything, everywhere," De Frias said.

Banks most in need of deleveraging include Deutsche Bank (DBKGn.DE), UBS (UBSN.VX), Royal Bank of Scotland (RBS.L) and Barclays (BARC.L), analysts said.  Continued...