NEW YORK -- Increased competition from foreign banks and U.S. financial services companies will force major consolidations within the weakened U.S. banking industry, analysts say.
The merger announced yesterday of Chemical Banking Corp. and Manufacturers Hanover Corp., creating the second-largest U.S. banking company after Citicorp, will be followed by many more such combinations, they said.
"Consolidation will be the buzzword for banking in the 1990s," said Fred DeBussey, banking analyst at Fitch Investors Service Inc., a New York rating agency.
U.S. banks need to reduce overhead and improve management "to compete with offshore institutions, which are intensifying the competition, as well as with General Electric and Merrill Lynch," he said.
DeBussey added that "the pool of talent is lacking" to manage 12,000 banks in the United States at a time when the industry needs to be better managed.
Gary Kleiman, president of Kleiman International Consultants Inc., New York, said foreign banks continue to make new inroads into the U.S. market "and their share will keep accelerating."
Foreign banks control almost one-third of U.S. business lending and in the first quarter of this year such loans were $11 billion higher than in the same period a year earlier, Kleiman said. Business lending by U.S. banks declined by virtually the same amount in the last year, he noted.
Foreign banks enjoy higher credit ratings than U.S. banks and are able to raise funds more cheaply and offer better deals to U.S. customers, he said. He portrayed them as anxious to participate in such loans to get a foot in the door, hoping this will lead to other business, as well.
"Meanwhile, the capital and asset strength of U.S. banks has deteriorated to the point that even if there are opportunities for them, the U.S. banks are not looking for new business," Kleiman added. "They are looking to retrench."
First, U.S. banks lost their competitive edge overseas "and now the same thing is happening here," he said.
The merger of Chemical Bank and Manufacturers Hanover will result in the loss of about 6,200 of the 45,000 jobs at the new, combined bank, to be called Chemical Banking Corp.
The combined institution will immediately begin a restructuring, in an effort to cut costs by $650 million a year.
The stock prices of both banks rose after the announcement of the merger, which analysts described as a good fit.
"It makes a lot of sense strategically for both institutions," said DeBussey of Fitch Investors Service, which said it was considering raising the rating of the combined bank.
Moody's Investor Service said it also was reviewing its rating for a possible upgrade and Standard & Poor's Corp. boosted the ratings outlook from stable to positive.