US banks in grip of merger mania

THE US banking industry has been bitten by the "bigger-is-better" merger bug, with banks combining at a record pace this year in a frenzied rush to cut costs, expand market share and compete better with other financial institutions.

Speculation last week about a $22bn (pounds 14bn) link-up between NationsBank and BankAmerica is just the latest ripple in a flood that has swept the sector. Already in 1995, there have been $42bn worth of publicly announced mergers - an all-time record - and there are still two months to go. So far, 300 banks across the country have made deals, and those not yet betrothed are nervously eyeing the field for possible partners.

It is a process transforming the US banking landscape. There are 10,168 different banks in the US today, still a high per capita number but significantly down from 14,417 10 years ago. If the merger mania continues, the number could fall by another 50 per cent by the end of the decade, according to a study from the consulting firm, Deloitte & Touche.

Most dramatic so far has been the proposed fusion of Chase Manhattan and Chemical Bank in New York, which is slated to create the largest US bank with assets of almost $300bn, topping the current number one, Citicorp, by about $40bn. Other notable marriages have been between First Union and First Fidelity, Nationsbank and Bank South, and First Chicago and NBD.

To underline the urgency of the trend, Wells Fargo launched an unusual hostile takeover bid earlier this month for its California rival, First Interstate, with an offer three times Interstate's book value. That combination would create America's eighth largest bank, but in recent days First Interstate has begun a search for a white knight to fend off Wells Fargo. Other possible contenders include Norwest Corporation and Banc One.

Fuelling the takeover binge is new legislation liberalising banking laws, which have traditionally kept US banks strictly contained within their state borders. Now banks are free to buy each other across state lines, and from 1997 they will be allowed for the first time to open branches in states across the country.

Meanwhile, the merger mania has had a galvanising effect on bank stock prices, which have risen by an average of 44 per cent this year.

Where bank mergers are concerned, every rumour is taken seriously. Early last week, the markets leaped on speculation that NationsBank, based in Charlotte, North Carolina, and BankAmerica of San Francisco, were in talks to tie the knot to create what would be America's first bank with a truly national presence. Shares in both banks briefly shot up in trading, even though the story originated from anonymous sources.

The two banks are known to have pondered a merger - the deal, worth $22bn if completed, would have been the secondbiggest in corporate history. But when analysts looked coolly at the potential, the market's ardour cooled.