The Investment Column: Banking on US deals

SO IS the bubble ever going to burst in the UK banking sector? As soon as the bull run in UK banking stocks started to grind to a halt, news of yet another merger injected new life into the shares.

Following the announcement earlier this week of a pounds 100bn mega-merger between Travelers and Citicorp, the US financial services giants, UK banking shares soared. But, as the week has gone on, the pace of trading has slowed, and with good reason. There is no logical argument why UK banks should be at all affected by the deal.

Take the retail banks. There are certainly growing commercial pressures for the industry to consolidate. But that has more to do with the influx of competition from the likes of supermarkets and hungry competitors such as Virgin than the Travelers-Citicorp deal.

What about the UK's rapidly dwindling number of merchant banks? The argument here is that a bank has to be a global player to survive. Even if this is true, it is hardly relevant to the UK.

Most UK merchant banks - Close Brothers, Singer & Friedlander and the like - are specialised outfits. They were never competing with the big boys even prior to Monday's news. And how about UK groups which have both retail and investment banking arms? Barclays and NatWest are unlikely to reverse their recent decisions to scale back on investment banking, and HSBC - which owns Midland - is not known for its hasty decision-making. HSBC could be mulling an acquisition, but it is difficult to believe this banking giant has been pressurised by the Travelers-Citicorp link-up.

Monday's share price rises look like a knee-jerk reaction in an already pricey sector. Although there may be some mileage to be had in selective buying of banking stocks, the sector as a whole is beginning to look overheated. And recent evidence that UK fund managers' brief flirtation with the sector could be coming to a close seems to suggest the peak could come sooner rather than later. Buyers beware.

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