Thanks to megamergers and strong profits, U.S. banking companies took three of the top five places in an American Banker world ranking of market valuations at midyear.

U.S. companies also accounted for 36 of the top 100 in market capitalization, whereas only 16 U.S. institutions appeared among the top 100 in assets as of yearend 1998.

Several analysts predict, however, that the U.S. dominance will be challenged in coming years as Europe's and Japan's economies improve and banks there become more bottom-line-oriented.

These analysts argue that after years of pruning their operations, U.S. banks are limited in their ability to sustain substantial earnings growth.

"U.S. banks got shareholder religion 15 years ago," said Andre Cappon, president of the New York-based CBM Group. "When you put shareholder religion together with a strong stock market, you get high valuations.

"Europe is going to be the hot place in banking for the next five years," Mr. Cappon said, adding that "the Europeans are going to start moving up on the Americans."

Joel P. Friedman, head of Andersen Consulting's $2 billion global financial industry practice, agrees that the Europeans and Japanese are becoming more like their American counterparts.

"In North America we are accustomed to the shareholder value issue," he said. "Two years ago, no Japanese bank CEO would have talked about shareholder value. Now executives everywhere talk about it."

He said bankers everywhere are competing for capital and seeking ways to deal with the industry's overcapacity.

European banks are beginning to consolidate, creating bigger institutions with higher market capitalizations-and relatively low returns to shareholders that, Mr. Friedman said, will pose major management challenges.

For now, at least, U.S. banks reign.

Citigroup Inc., the product of last year's merger of Citicorp with Travelers Group, was No. 1, with a market value of $160.5 billion. Bank of America Corp. followed at $128 billion. Chase Manhattan Corp. was fifth with $73 billion, Wells Fargo & Co. sixth with $70.6 billion, and Bank One Corp. seventh with $70.3 billion.

Two London-based companies made the top five-HSBC Holdings PLC, with market capital of $99.3 billion, and Lloyds TSB Group PLC, with $73.8 billion.

Some analysts see U.S. banks continuing to dominate in market capitalization because more big mergers are likely. Ronald Mandle of Sanford C. Bernstein, for example, said Wednesday that he expects more big mergers in the United States. These observers foresee further improvements in the efficiency of U.S. banks.

In addition, they say, it will be difficult for Europeans to become more efficient, because local laws prohibit massive layoffs or make them prohibitively expensive.

U.S. banks generally seek to pare away assets that are seen as preventing the achievement of return-on-equity goals. But elsewhere, many bankers prefer to see growth in balance sheets.

Citigroup, for example, was third in yearend assets, at $668 billion. Deutsche Bank AG of Frankfurt, which ranked 17th in market capital, ranked first in assets, at $735 billion of assets.

UBS Group of Switzerland, ninth in market cap, was second in assets, with $687 billion.

Among the winners in terms of percentage gain in market capital was Hang Seng Bank Ltd. of Hong Kong, up 97%, to $21 billion. Bank of Scotland rose 75%, to $24.3 billion, Fuji Bank 56% to $24 billion, and National Westminster Bank PLC 48% to $44.3 billion.

The top decliner was Minneapolis-based U.S. Bancorp, off 22%, to $24 billion, amid concerns about future revenue growth. Credit Suisse fell by 22%, to $47 billion. Its Swiss counterpart, UBS, lost about 20%, to $61 billion, reflecting a decline in the value of the Swiss franc and heavy losses from hedge funds and investments in Russia.

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