More realistic pricing, rising excess capital, cost savings, and concern over increasing technology costs will combine to prompt a record number of mergers and acquisitions in the U.S. banking industry next year, according to Thomas Hanley, a CS First Boston analyst.

By 1998, when this predicted wave of mergers and acquisitions will be nearing its end, he said, the number of major players in U.S. banking will have shrunk from 40 to 15.

After then, when the final round of consolidation takes place, "megamergers" between money-center banks and superregionals are likely to occur.

Among financial companies Mr. Hanley listed as likely takeover candidates in 1996 are Cullen/Frost Bankers Inc., Integra National Bank, Fourth Financial Corp., Leader Financial Corp., AmSouth Bancorp., and First Fidelity Bancorp.

The analyst suggested that foreign banks, in particular large German and Swiss banks, might play an important consolidating role. But rather than buying up large U.S. banks, he said, foreign institutions are more likely to zero in on smaller money market and capital markets operations, such as brokerage firms.

However, he saw one combination between a large U.S. bank and a foreign bank as a possibility: HSBC Holdings PLC buying Bank of Boston Corp.

"Foreign banks have a huge competitive advantage over U.S. banks because of the strength of their currencies," Mr. Hanley noted.

Money-center banks are unlikely to try to acquire large investment banks if current restrictions under the Glass-Steagall Act are lifted, he said. Instead, they will probably seek to build up their in-house trading and investment banking businesses.

Regional banks, however, will probably move fairly quickly to acquire regional brokerage firms, he predicted.

Mr. Hanley stressed that several elements - including growing excess capital, declining expense ratios, and improving returns on assets - are all now working to accelerate banking's consolidation.

CS First Boston forecast for 36 banks, including most of the top U.S. banks, a 10.3% compounded annual average increase in net income from 1994 to 1997. The average of these banks' return on average assets during the same period will rise from 1.03% to 1.17%. Operating expenses as a share of revenue will decline from an average 63.1% to 57.8%, and the group's tangible common equity ratio will rise from 5.91% to 7.08%.

In addition, the banking industry's excess capital will rise from an estimated $40 billion this year to $150 billion by the year 2000.

"That excess capital will become increasingly important when banks buy back their own shares and the shares of other banks," Mr. Hanley observed. "Banks will be doing more and more cash deals, and they will also be buying nonbanks."

CS First Boston estimated that the banking industry's excess capital could be used to repurchase 14% of its shares outstanding.

The investment banking company also estimated that the same amount of capital could be used to buy 32% of the outstanding shares of other financial institutions, including securities brokers and dealers, personal credit firms, mortgage companies, and insurance brokers.

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