Differences in performance at major European banks over the next few years will lead to a wider divergence in ratings, according to analysts at Standard & Poor's ratings group.

"We see more pressure on downgrades and bigger gaps between better and lower-rated banks," said Scott Bugie, a director with the rating agency in Paris. Mr. Bugie spoke in New York at a one-day seminar last week on current trends in creditworthiness among banks.

Among the reasons for ratings to diverge, S&P analysts said, are deregulation and increased competition. Both are reducing European banks' net interest margins and raising concerns about future asset quality.

Mr. Bugie noted that ongoing declines in real estate prices have continued to pose problems for real estate portfolios at large European banks, particularly French banks. He also said that heavy lending in other areas, such as project finance, could backfire on banks in the event of an economic downturn.

Since 1989, S&P's average rating for large European banks has declined from AA to AA-minus. Analysts noted that although European banks enjoy some long-term benefits, like relatively low inflation and a more-regulated banking environment, they also have lower returns on capital and lower loan growth than U.S. banks.

S&P analysts noted that there was no direct correlation between operating efficiencies and ratings. But they said that better-rated banks tended to have lower operating costs. On average, banks rated AAA by S&P had an average expense to revenues ratio of 56.6% in 1993, while banks with an A rating had an average 67.07% ratio.

The challenge for European banks, S&P analysts say, is to introduce tougher cost controls and stricter lending policies.

"The solutions, for both U.S. and European banks, lie in increasing fee- based income, decreasing operating expenses, mergers and acquisitions, and electronic delivery," remarked Xavier Chavee, a director in S&P's financial-institutions unit.

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