Sept. 26 (Bloomberg) -- JPMorgan Chase & Co. cut price estimates for Spanish bank shares, citing risks to earnings from higher funding costs and slower lending growth.

JPMorgan cut Banco Espanol de Credito SA, a Spanish retail bank owned by Banco Santander SA, and Banco Pastor SA to ``underweight'' from ``neutral,'' London-based analysts Ignacio Cerezo, Carla Antunes da Silva and Andrea Unzueta said today in a report to clients.

Spanish banks have expanded their lending at three times the rate of deposit growth over the last 10 years to fund the country's housing boom. Their increasing reliance on wholesale funding to close the gap has made them more vulnerable when debt markets seize up, the JPMorgan analysts said.

``It is easy to understand investors' jitters about Spanish banks' ability to finance their balance sheet expansion,'' they wrote in the report.

Even so, the banks have shown a ``fairly careful stance'' regarding their liquidity needs, the analysts said. Spanish banks have an average loan-to-deposit ratio of 173 percent, compared with 123 percent for European banks, the analysts said.

``Following Northern Rock's troublesome situation, we have received frequent investor calls trying to get some clarity about the chances of Spanish banks facing a similar situation,'' the analysts wrote. Northern Rock, a U.K. mortgage lender, was bailed out by the Bank of England this month after becoming too reliant on wholesale funding markets.

JPMorgan has a ``strong preference'' for Santander and Banco Bilbao Vizcaya Argentaria SA, Spain's biggest banks with profits coming from beyond their home country. Santander is JPMorgan's top pick, the analysts said.

              New Price   Prior      Today's
              Estimate    Price      Closing
              (Euros)     Esimate    Price

Santander     15.20       15.80      13.52
BBVA          20.00       22.00      16.43
Popular       12.10       14.30      11.86
Bankinter      9.70       11.30      10.06
Banesto       14.20       16.00      12.94
Sabadell       6.90        8.00       6.66
Pastor        12.60       16.00      11.70

To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net.

Last Updated: September 26, 2007 12:35 EDT