Bank shares soar on deal

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The Independent Online
THE news of the $155bn (pounds 93bn) link-up between Travelers and Citicorp sent European banking shares sky-high as dealers speculated about the candidates for the next financial mega-merger.

All UK banking stocks - including NatWest, the Royal Bank of Scotland and Barclays - soared. NatWest shares jumped 4 per cent to pounds 11.62, Royal Bank of Scotland climbed 4.3 per cent to pounds 10.00 and Barclays rose 3.6 per cent to pounds 18.42.

The surge in banking shares pushed the FTSE 100 index to its fourth consecutive record close - up 41.6 points to 6,105.8.

Although experts were united in the belief that the Travelers/Citicorp deal would inevitably be good news for bank shareholders in the short-term, they were divided both about the strategic wisdom of financial mega-mergers and about the effect of such deals on the long-term value of financial stocks.

Some in the City thought the deal upped the pressure on European banks to "do a deal". Tim Clarke, banking analyst at Nikko Europe, said: "It really does make companies such as Barclays and NatWest look vulnerable. This is bound to retrigger the type of speculative stories that were going on until only recently."

Barclays and NatWest both recently withdrew from the global investment banking stage at a substantial cost to their shareholders. The perceived underperformance of both banks over the past year has prompted continual speculation that the two could merge. This speculation intensified in the autumn after it emerged that Martin Taylor, Barclays' chief executive, had made informal merger overtures to Derek Wanless, his opposite number at NatWest.

Alistair Walton, managing director of European financial institutions in the mergers and advisory division of Credit Suisse First Boston, thought the deal merely speeded up the pace of change in Europe. He said: "The European response won't be any different, it'll just be faster."

Mr Walton expects there to be considerable acquisition activity in Europe. He believes there will be consolidation both within different financial services industries - that is, banks buying other banks - as well as across different financial services industries - such as banks buying insurance companies.

An analyst at a leading US investment bank, who declined to be named, said the news would undoubtedly boost banking stocks. "The pace of consolidation throughout commercial and investment banking has been a potent force for share price movement," he said.

But he added that the news did not really change anything in Europe, saying that the pace of consolidation, at least on the Continent, was mainly being driven by domestic considerations.

Professor John Kay, director of the Said Business School and a director of London Economics, the consultancy, was on the side of the cynics. "If there's a good reason for this type of deal, I've yet to hear it," he said.

He was sceptical that there would be large gains either from cross-selling of financial products or from realisation of economies of scale. "It seems that Citicorp is sufficiently large already to exploit whatever economies of scale exist," he said.

Unlike recent banking mergers - such as the deal between UBS and SBC, the Swiss banks - there are unlikely to be substantial UK job losses as the European operations of Travelers and Citicorp are almost entirely complementary.