Strong earnings and robust market values should make commercial banks the dominant buyers as the financial services industry approaches "full consolidation," according to the head of Goldman, Sachs & Co.'s financial institutions group.

"Banks have the money," said J. Christopher Flowers, managing director at Goldman, during a conference on bank mergers last week in New York. "They are destined to be the biggest acquirers in other sectors."

The investment bankers' remarks were delivered before the announcement of the blockbuster $10.2 billion merger of two Wall Street giants, Morgan Stanley Group and Dean Witter, Discover & Co.

Mr. Flowers noted that the nation's 25 largest banking companies have $458 billion of market capitalization. And that amounts to a war chest larger than those of the 25 largest companies in other sectors where banks want to make acquisitions.

He predicted "full consolidation" of the banking, insurance, credit card, securities, and asset management industries would be achieved within four years.

Other industry observers pointed to the fact that stocks of banking companies are trading at much lower price-earnings ratios than those of nonbanks as a reason this sort of deal rarely happens. But Mr. Flowers looks at things from another angle.

He said a stock market decline-he didn't theorize when that might happen-would make it possible for major banking companies like New York's Citicorp to buy asset managers or other companies they want.

"It'll be a mess" for the valuations of asset management firms when the stock market drops, he acknowledged, "but it will still be an attractive business."

The investment banker spoke at the Practicing Law Institute's conference on "Financial Institution Mergers and Acquisitions-the New Era."

Mr. Flowers' financial institutions group at Goldman Sachs was the investment adviser for $25.6 billion worth of banking-related deals last year, more than any other Wall Street firm. It was party to 1996's two biggest deals, the mergers of Wells Fargo & Co. with First Interstate Bancorp and NationsBank Corp. with Boatmen's Bancshares.

Like most investment bankers, Mr. Flowers sees the future of banking as belonging to a small group of well-capitalized money-center and regional banks offering an array of financial services.

He warned that time may be running out for executives at small and midsize banks waiting for some giant to buy them at a huge price. Many of the major acquirers of recent years, he said, have set their sights on other things.

"You call someone like NationsBank and ask if they want to make a deal" for a small bank, Mr. Flowers said, "and you often hear them say they can't be bothered."

At the same time, he believes there is ample reason for more huge deals like the NationsBank-Boatmen's merger. A merger between NationsBank Corp. and BankAmerica Corp. would create a company that could serve 63% of the population, he said.

He also predicted that banks that survive the consolidation wave would set their sights on markets abroad after "full consolidation" is achieved at home.

"Asia is a natural place to look, and there will be interest in Europe as well," he said, adding, almost as an afterthought, that Latin America could offer possibilities for banks seeking to replicate the success Citicorp and Bank of Boston Corp. have enjoyed in those markets.

Such exuberance, of course, is of the kind that disturbs regulators like Julie L. Williams, chief counsel at the Office of the Comptroller of the Currency.

"We see smaller banks looking at emerging markets, and we wonder, 'Do they have the expertise and experience necessary?'" Ms. Williams said. "Or are they charging in blind?"

Mr. Flowers has offered venturesome pronouncements before about the course of consolidation in the banking industry.

Among the most notable was his prediction, last October, that the number of hostile bids is almost certainly bound to increase.

So far, most deals in banking have been handled on friendly terms to both the buyers and sellers. But as the number of "makes sense" deals continues to decline, Mr. Flowers asserted, hostile expansion activity will almost certainly increase.

Mr. Flowers made clear that he was not forecasting more full-scale takeover campaigns akin to Wells Fargo & Co.'s 1995-1996 pursuit of First Interstate or Bank of New York Co.'s 1987-1988 quest for Irving Bank Corp.- both of which succeeded.

Such major efforts as those will continue to be rare in the banking industry, he said. What he does expect is an enlargement of semi-hostile activity, including moves generated by dissident shareholders.

At the same time, Mr. Flowers has been consistent in predicting a consolidation timetable. Last week, he said that the bulk of activity would take place during the next four years. A year earlier, at a similar conference, he had offered a five-year scenario for the "consolidation ball game."

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