European banks must act soon if they want to prevent the rapidly growing US giants from muscling in on their turf.

The recent financial results from some of the US banking giants show that they continue to stride far ahead of their international competitors.

Bank of America (BofA) is a post-merger success story, posting record earnings for 2004 of $14.1bn, up 31% from 2003.

And Citigroup reported net income of $17bn for the year, down 5% on the previous year. However, without the $4.95bn after tax charge for the WorldCom class action settlement and increased reserves related to other regulatory settlements, Citi would have posted net earnings of $21.2bn – a 19% increase on 2003.

The widening gap between US banks and many European firms begs two questions: can European banks ever rival them in size or profitability, and could US banks look to Europe for future growth?

There is still room for consolidation in the US. Some analysts believe Citigroup, Wells Fargo, JPMorgan Chase and Wachovia have the appetite to pursue large deals. But will they keep their sights trained on the US alone?

BofA is also an interesting case. While no-one claims it is seeking another acquisition (especially so soon), it has reached the 10% market cap for national deposits, which prevents it from pursuing additional mergers in the US market. European targets could look appetising in light of the brake this may put on its continued growth.

Europe’s banking sector is ripe for consolidation but domestic M&As are few and far between, let alone cross-border acquisitions.

Speculation has been rife in the first few weeks of 2005, though, linking Sanpaolo IMI with Dexia, Wells Fargo with Barclays, Royal Bank of Scotland with ABN AMRO and Unicredit with HVB. Other potential candidates include Commerzbank, Capitalia and BNL.

There are two main criteria that make banks attractive to foreign acquirers: underperformance relative to peers; and operating in a country that, through inefficiencies or lack of competition, offers more potential to grow earnings than the acquirer’s own market. Many Italian banks would whet the appetite on both counts and several German banks qualify on the second.

The EU has failed to create a single financial market and national regulators continue to rule the domestic roost. US giants may not have stated intentions to move overseas but their sheer size may be perceived as a threat.

Will the recent wave of mergers among US banks prove an incentive to pan-European mergers, and force protectionist national regulators to open their doors to foreign firms? Or will US players move in while Europe is struggling to get its act together?

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