Deals set to send European shares soaring

EUROPEAN banking shares are expected to soar today as shock waves from two of the biggest financial deals the world has seen reverberate around the stockmarkets. Analysts predicted the consolidation in the industry still had some way to go and more mega-deals could be just around the corner.

Lanny Sachnowitz, a portfolio manager who has 22 per cent of the $6bn AIM Charter Fund in banks, commented on the NationsBank-BankAmerica deal: "These companies have tremendous cost structures that have to be ripped out to remain competitive. The only way to do that is to combine operations and have mammoth numbers of customers. The market response will be favourable, but it remains to be seen whether this'll work out. The largest and larger mergers are tougher and tougher to put together.''

United States financial stocks have already risen to record highs in the wake of last week's announcement that Citicorp and Travelers Group were to merger to create an $80bn (pounds 50bn) powerhouse in the largest deal in corporate history. "This [yesterday's deal] is continuing the consolidation in an industry that is completely oversupplied,'' Mr Sachnowitz said.

"You'll see tremendous combinations along the lines of Citicorp and Travelers. It's not just combining two banks, that sold traditional banking products, but combining other financial services under one umbrella.'' The fundamental restructuring of the world's banking system initiated by the Americans is likely to change the face of the global finance industry and have implications for most European banks.

The deals will once again turn the bid spotlight on United Kingdom banks, and analysts expect the news to send their shares, and the stockmarket generally, to new heights. The banking sector has already enjoyed a storming run over the past few months, comfortably outperforming the wider stockmarket and seeing stock prices rise to record levels.

The move will put increasing pressure on UK banks to consider mergers and some City observers believe it is only a matter of time before several of Britain's financial giants will have to join forces to compete with the banking goliaths which are being created across the Atlantic.

High-street giants such as NatWest, Barclays, the Halifax and the Royal Bank of Scotland could be likely merger or takeover candidates and consolidation in the sector could see some of Britain's best-known banking names disappear over the next few years. The American deals will also increase pressure for cross-border deals to create a pan-European bank.

The rapid consolidation of the US banking sector is likely to prompt banks such as Lloyds TSB, which has announced it is looking for significant new purchases, to accelerate expansion plans and hit the acquisition trail.

As well as a sharp rise in the shares in all four American banks involved in the mergers yesterday, other financial stocks such as JP Morgan and Merrill Lynch and regional banking groups leapt upwards as US traders speculated on who would be next takeover target. However Citicorp's and Traveler's stock slipped after the sharp rise in their share prices last week as the market reacted to the creation of two significant new competitors.