European and Canadian banks expanded in force in the United States last year as Japanese banks continued their headlong retreat, according to a survey by American Banker.

Foreign bank assets in the United States fell by $42 billion, or 3.5%, to $1.15 trillion during the 12 months ended June 30, 1998.

Most of the decline was attributable to the Japanese banks, whose U.S. assets fell 24%, to $291.6 billion, in that period. The Japanese drop was partly offset by growth at some of Europe's and Canada's largest banks, including Deutsche Bank, Bank of Nova Scotia, and Barclays Bank.

"The name of the game is more capital," said Richard Capone, chief executive for the Americas at UBS of Switzerland. "You either get big or you get very specialized. Anyone in between is going to get crushed."

UBS' U.S. assets increased 73.5% last year, largely because of its merger with Swiss Bank Corp.

To be sure, some European banks, such as Holland's ABN Amro and France's Credit Lyonnais and Credit Agricole Mutuel, trimmed their U.S. assets. But many foreign banks looked to acquisitions and other strategies to sharply boost their U.S. balance sheets.

As a result, the foreign banking business in the United States is becoming increasingly concentrated among a handful of large institutions, the survey revealed. As of June 1998, the top 25 foreign banks in the United States held 68.4% of all foreign bank assets, up from 60.6% a year earlier.

Analysts such as Gary Kleiman, president of Kleiman International Consultants Inc. in Washington, said they expect that trend to continue unabated.

"Competition is global, and consolidation will accelerate," Mr. Kleiman said. "The trend is very clear, and consolidation among European banks as a result of the introduction of the euro will accelerate it."

Meanwhile, the Japanese banks continued to pull back. They accounted for 25.5% of foreign bank assets in the United States on June 30, down from 47.4% three years earlier.

Still, some observers said Japanese banks could well redevelop their U.S. activities in the future.

"I certainly don't think we've seen the last of the Japanese," said Rick Richardson, managing partner of the financial services industry practices at PricewaterhouseCoopers. "The foreign activity of any of the major international players can ebb and flow, depending on how things are going in the home country and what strategy banks have internatonally."

"Everybody is reorienting and being more selective, including the Japanese," Mr. Kleiman said.

"They, like everyone else, are trying to separate the commodity businesses from the real margins and reach some sort of happy medium."

Not all foreign banks view large balance sheets as the measure of their American success. Dresdner Bank of Germany, for example, has deliberately chosen not to increase capital-intensive lending.

Instead, said Jon Hartzell, director for group strategy and economics for Dresdner Kleinwort Benson in New York, Dresdner prefers to "move higher up the food chain by concentrating on more complex operations that bring in fee income."

"The days when you made money on money are past," Mr. Hartzell said.

Among the American Banker survey's other findings:

Derivatives held for trading at the top 25 foreign banks fell 33% over the period as a result of market volatility.

Commercial letters of credit issued by foreign banks fell 21%, to $11.1 billion, amid a slump in U.S. exports to Asia.

Small-business lending by foreign banks remained virtually unchanged, with HSBC Holdings PLC ranked the biggest small-business lender among foreign banks.

Foreign banks, led by Japanese banks, closed 23 U.S. branches and agencies over the period, bringing the total number of such offices to 552.

Commercial and industrial loans among the top 25 foreign banks rose 4%, to $204 billion.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.