LONDON -- Nicholas Goodison, chairman of TSB Group PLC, said mergers in Britain's financial-services sector would not end with the current bidding battle for Midland Bank PLC.

"The next five to 10 years will see more rationalization among banks and building societies," he said in an interview. "There is excess cost in the sector, and banking per se is more a stable than a growth industry."

Mr. Goodison said sluggish economic conditions and the prospect of a shallow recovery with more moderate profit growth were factors highlighting the need for rationalization.

"I do not see a return to the huge expansion of the 1980s, with its credit boom and rapidly expanding property markets," he said. "Tough times are still ahead, and recovery, when it comes, will take us toward a steady consolidation."

This year will bring signs of a "slow, shallow recovery," Mr. Goodison said, with more improvement likely in 1993. "It will take a long time for homeowners to get used to the new, more moderate level of property prices, and the fear of unemployment is also affecting consumer confidence," he said.

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