Foreign banks beat a retreat from the United States last year.

American Banker's annual survey of international banks' activity in the United States-data tables begin on page 14-shows declines in their assets, deposits, and number of offices.

Largely responsible for the backsliding were 49 Japanese banks, the single largest contingent of foreign banks in the United States, which have faced mounting loan problems at home.

"Japanese banks have had to tighten their capital ratios, and this has meant reducing assets," said Guy Manuel, a partner in CBM Group, a New York-based consulting firm.

"Japanese banks are clearly under pressure to strengthen their ratios because of their weak domestic situation," said David Bodner, executive vice president for North America at Bank Julius Baer.

"They've tended to be less visible on the international markets as a result," said Mr. Bodner, who is based in New York for the Swiss private bank.

But bankers also stressed that as the U.S. market consolidates and competition gets tougher, foreign banks are reassessing their strategies.

"The United States is becoming more and more a market for big players," observed Serge Bellanger, executive vice president and general manager for Compagnie Financiere de CIC et de l'Union Europeenne.

"Small players do not live very well any more unless they have a market niche, while medium-size players are asking themselves which way they should go and whether they should continue to expand internationally.

"There's a real strategic search going on," Mr. Bellanger added.

According to the latest American Banker survey, banking companies based outside the United States reduced their assets by 5%, to $962 billion, as of midyear 1996.

Deposits fell 8%, to $516 billion, while the number of full U.S. banking offices had a net decrease of 34, or 5%, to 619.

In 10 years of almost uninterrupted growth in foreign bank activity in the United States, the only previous decrease in assets occurred in 1993, when they fell just 1.6%.

Aside from the Japanese factor, part of the decline can be attributed to divestitures, such as London-based Natwest Group's sale of its $30 billion U.S. regional bank to Fleet Financial Group.

But problems in home countries, especially among Japanese banks, tend to say more about foreign banks' U.S. positions.

Assets of Japanese banks dropped 21%, to $355.6 billion. Deposits were off 22%, to $201 billion, and the number of full banking offices fell to 129 from 142.

The decline in Japanese bank assets was pretty much across the board.

Assets at Bank of Tokyo Mitsubishi Ltd., the biggest foreign bank in the United States, fell to $81 billion from $97 billion a year before.

Sumitomo Bank Ltd. was down to $31 billion from $39.6 billion, Industrial Bank of Japan to $30.7 billion from $37 billion, Sanwa Bank Ltd. to $29.7 billion from $39.8 billion, and Fuji Bank Ltd. to $28 billion from $36 billion.

In aggregate, Canadian, French, Dutch, Swiss, German, and South Korean banks increased assets, while British, Italian, Brazilian, and some other Latin American banks reduced theirs.

Among the Europeans, by far the biggest surge came at French banks, which increased assets by 19% to $121 billion. They and other major European banks, analysts said, have been bulking up, mainly in government securities, so that they do more corporate securities underwriting and distribution under section 20 of the Bank Holding Company Act.

Section 20, with its recent modifications, allows banks to earn up to 25% of certain revenues from investment banking activities that were historically restricted by the Glass-Steagall Act.

"With the Office of the Comptroller of the Currency and the Federal Reserve loosening restrictions, a number of European banks are clearly positioning themselves to get into investment banking," said Gary Kleiman, president of Kleiman International Consultants Inc. in Washington.

"A relatively small number of banks are making a big push into investment banking," said Mr. Bodner of Bank Julius Baer. "But it's still a game for the big guys and you have to be a pretty sizable institution to play in that market."

Observers also attributed at least part of the retreat to tougher competition for business in the United States. They said this has prompted foreign banks to turn to emerging, faster-growing economies in Latin America, Asia, and Eastern Europe.

"Traditional commercial banking has become a low-margin business and it's always been very hard to compete against entrenched players whether it's in the U.S. or elsewhere, " Mr. Manuel observed.

In a recent report on international bank lending, the Bank for International Settlements in Basel, Switzerland, indicated that European banks have to some extent shifted the focus of their operations away from Europe and the United States because of low returns in Europe and "the perceived difficulties in trying to access the U.S. market."

Among the American Banker survey's other findings:

Bank of Tokyo-Mitsubishi Ltd., at $81 billion of assets the largest foreign bank in the United States, was ahead of second-place ABN Amro of Holland, parent of Chicago-based LaSalle Bank Corp., by about $35 billion. France's Credit Lyonnais was $5 billion behind ABN Amro, with $40.5 billion, followed by Paris rival Societe Generale with $35.8 billion

New York City continued to be the primary destination, with 380 non- U.S. bank offices. Los Angeles ranked second with 109 offices, followed by Chicago, Miami, San Francisco, Houston, and Atlanta.

Deutsche Bank was the top foreign bank in derivatives trading, with $605 billion in off-balance-sheet derivatives contracts held for trading. Next came Swiss Bank Corp. with $421 billion and Credit Lyonnais with $282 billion.

Swiss Bank Corp.'s New York office was first in commercial letters of credit, with $1.5 billion outstanding. International Commercial Bank of China in Los Angeles was second in this category among foreign banks, at $1.3 billion. Bank of Tokyo-Mitsubishi in Portland, Ore., was third, with $742 million.

Commercial and industrial loans by foreign banks rose only slightly in the 12-month period, by 5.6% to $249 billion.

Foreign banks still hold 22% of overall U.S. banking assets, a ratio that has barely changed in recent years. Some observers, including Mr. Bellanger, speculated that foreign banks' presence may not get much greater.

"We're in a very mature market, margins are thin, and market penetration is slow," he noted.

Others, however, shrugged off the asset decline, noting that foreign banks continue to play an important role in financing for the domestic economy.

"Five percent is not exactly a large decline," Mr. Bodner said.

"The U.S. operations of international banks continue to be an important source of credit for U.S. borrowers and enhance the overall depth and liquidity of U.S. financial markets," said Lawrence Uhlick, executive director and general counsel of the Institute of International Bankers, the New York-based association for foreign banks in the United States.

Some observers contended the retreat is likely to be temporary. They pointed out that although older, more established foreign banks may have cut back, a rising number of banks from emerging markets are opening up in the United States and may soon begin to build their balance sheets.

"Even Russian banks are opening U.S. offices," Mr. Kleiman noted.

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