Business outlook: Established banks must adapt, merge or die

Consolidation, both on a national and cross-border basis, will again be the dominant theme of the year for the financial services industry. Information technology and the coming of the single European currency promise a new age of low-cost banking and other forms of financial service as national frontiers and other barriers to entry break down.

For most established banks and savings organisations it is a question of "adapt and compete, merge, or die".

The merger wave which swept through investment banking towards the end of last year looks set to continue well into the new year. The ones to watch are second-tier continental banks with global ambitions, Commerzbank and Paribas, for example.

For the likes of Commerzbank, options include a link-up with a US firm looking for a European leg, such as Donaldson Lufkin & Jenrette, or perhaps a deal with a continental rival.

A Commerzbank/Deutsche Bank merger perhaps? Unlikely, say the analysts, but stranger things have happened. Neither is it necessarily the end of the action at the banks that grabbed the headlines in 1997. UBS and SBC remain relatively weak in the US, and 1998 could see the two Swiss banking giants hitting the acquisition trail again.

The demise of the medium sized, independent British investment bank is another feature of 1997 set to re-emerge in 1998. Schroders, Robert Fleming, Rothschilds and Lazards will all be under the spotlight.

Look out for a raft of disappointing financial results as banks own up to having had their fingers burned by equity derivatives in last autumn's volatile markets. JP Morgan and Chase Manhattan are among the few to admit to being caught out by recent gyrations of the financial markets. More are bound to follow suit in the first few months of the year.

Watch out too for a raft of cross financial services mergers. IT is blurring previously distinct financial products and channels of distribution as never before. To help cover the costs of expensive branch networks and defend present rates of return, traditional high street banks will step up their efforts to diversify into other financial products, such as life assurance. A deal between Barclays and Legal & General was one of the many merger rumours doing the rounds in 1997. It is a story that's likely to come around again.

The Financial Services Authority, bringing together previously distinct financial regulators and supervisors under one roof, will come into its own this year. The creation of such a monstrous bureaucracy carries obvious dangers, though most commentators agree that the approach is fundamentally sound. All the same, the scope for cock-ups is high.

- Lea Paterson