NEW YORK ( TheStreet) -- Barclays ( BCS) strategy for world domination appears to have met with some unpleasant realities and it could be a lesson for other foreign banks eyeing U.S expansion. A report by the Financial Times late Tuesday night that the bank is planning to lay off "up to several hundred employees," in its Barclays Capital investment banking unit due to a dropoff in business hit Barclays' shares hard on Wednesday. Barclays' U.S.-listed shares closed down 8% at $19.50 on the day, making it the worst performer in a dismal session for shares of just about anything, European banks included. Barclays has been viewed as one of the winners coming out of the crisis. Barclays Capital was already building a significant global presence and its purchase of Lehman Brothers' U.S. businesses after Lehman filed for Chapter 11 bankruptcy protection was viewed as a major coup. In March, The Wall Street Journal reported that the British bank was also looking to grow its U.S. retail banking business. Barclays is already the eighth largest bank holding company in the U.S., and the largest foreign-owned bank. Signs of a dropoff in business at Barclays demonstrates the challenges facing large global banks that want to take advantage of expansion opportunities in U.S., both in the institutional and retail side. In many ways, the climate seems ripe for a big foreign bank to start buying up market share in the U.S. Citigroup ( C - Get Report), Bank of America ( BAC - Get Report), JPMorgan Chase ( JPM - Get Report) and Wells Fargo ( WFC - Get Report) are far and away the biggest U.S. institutions, but they are all at or near their limits in terms of the amount of U.S.-based deposits they are allowed to hold under current rules. At the same time, banking industry watchers say there will have to be widespread consolidation in the U.S., as many small and mid-sized banks cannot find a business model that works in the wake of the U.S. housing crisis. Most banks relied heavily on real estate lending--a strategy that cannot continue, but is not easy to replace. Still, as the following chart shows, the four U.S. giants have such a large lead over everyone else, a foreign bank would need to make several acquisitions in order to achieve a similar size.
"Nobody's ever going to be one of the four largest banks in the country, but you could build some pretty good regional franchises," says Andrew Senchak, vice chairman and investment banker at Keefe, Bruyette & Woods. Indeed, regional deals are getting done, and are expected to continue. But they are relatively small potatoes. As the chart below shows, the largest foreign bank acquisition since the crisis was Spain's Banco Bilbao Vizcaya Argentaria ( BBVA) buying Guaranty Bank in a government-assisted deal. But that transaction added just $11.4 billion in assets to BBVA's total--a mere rounding error when you consider that Wells Fargo, the smallest of the big four, has $1.2 trillion in assets. Larger deals have been floated, including talks between another Spanish giant, Santander ( STD), and M&T Bank Corp. ( MTB), but those appear to have cooled off, and picking up M&T's roughly $70 billion in assets, while doubling the size of Santander's U.S. footprint, would still make it roughly a tenth the size of Wells Fargo. Barclays may still be worth keeping an eye on, however. One banking industry dealmaker says Barclays' U.S. ambitions remain active, and the acquisitive behavior by Santander has come despite concerns about European sovereign debtlevels that have wiped billions of dollars off its market cap in 2010. Robert Statius-Muller, London-based consultant at Greenwich Associates, says that while many European banks would like to grow in the U.S., many have nearer-term concerns about replacing debt funding that is coming due in the next couple of years. Statius-Muller believes Chinese banks may be better positioned from a balance-sheet perspective to make acqusitions in the U.S., but he isn't sure U.S. regulators would look favorably upon Chinese banks buying up market share in the U.S.
Regardless of whether Barclays or another foreign-owned giant cracks the top tier of U.S. retail banks, expect to see small and mid-sized deals aplenty, says Sandler O'Neill investment banking co-head Brian Sterling. "The long-term trend that we have seen is that the U.S. banking market is less consolidated than many other developed countries and so there is an ability by a non-U.S. party to come in, and, through acquisitions and otherwise, to build a significant bank in the United States," Sterling says. -- Written by Dan Freed in New York.