More European banking M&A to come, Morgan Stanley says

LONDON (Reuters) - European banking mergers and acquisitions (M&A) will continue at a rapid pace, as banks adjust to a lower-leverage world and strong lenders pick off weaker rivals, a leading sector banker said on Tuesday.

William Chalmers, head of European banks within Morgan Stanley's financial institutions group, said many banks needed to adjust their business models to survive now wholesale funding was more costly and less freely available.

"Looking forward to the next 18 or maybe even 24 months, I suspect that most financial institutions M&A bankers will be pretty busy," Chalmers told the Reuters Global Finance Summit in London.

"Deleveraging, consolidation and so forth are going to contribute to a reorganization of financial assets between institutions -- banks, insurers, and hedge funds. That is going to lead to quite a lot of M&A," Chalmers said.

"I don't think I'd characterize the next 18 months as being emergency rescue deals, more strategic consolidation that is done at a slightly slower pace," he added.

While the credit crisis has prompted a 25 percent slump in global M&A, it has triggered a raft of crisis mergers among banks, with deals in the sector this year hitting a record $623 billion by November 6, Thomson Reuters data showed.

"OUTSIZED PORTION"

Chalmers, who has advised on deals including HBOS's HBOS.L sale to Lloyds TSB (LLOY.L), said stronger banks would buy weaker peers as the economy soured. "In all likelihood as we go in to a macro downturn that's a process that's going to continue."

"The larger, stronger institutions may have assets that are less-than-great on their balance sheets, but they don't have to sell the good ones to subsidize the bad ones and that's a tremendously advantageous position to be in," he said.

This year financial deal-making has made up almost 23 percent of worldwide mergers, Thomson Reuters data showed, and Chalmers said it would continue to make up a big chunk of next year's deals.

"Overall I'd expect financial services M&A to be an outsized portion of M&A as a whole during the next year," he said.

Emmanuel Gueroult, Morgan Stanley's head of European equity capital markets, said banks would also continue to tap the equity markets next year to shore up their balance sheets.

"There's going to be a massive amount of recapitalization to come through here," he told the summit.

(Reporting by Quentin Webb and Steve Slater)