European investors have been talking about the possibilities and potential benefits of cross-border banking mergers for years. Indeed, it is such an old story that many of us have grown weary of the periodic hype surrounding the idea and have all but given up on anything meaningful ever happening.

Will the likely merger of the UK's sixth-largest bank, Abbey National, with Spanish giant Santander Central Hispano (SCH) reawaken the European banking sector? Should we now be buying up potential acquisition targets in the hope that bidders are out there waiting to pay a significant premium?

The financial sectors of most stock markets are so large that any overall market view must explicitly take into account the prospects for banks and insurance companies. Recent weakness in European equities has arisen for a number of reasons, with the financial sector playing a significant role.

Many London-based analysts believe the current cycle for insurance companies is already past its peak: both margins and volumes for the various lines of business for the sector are thought likely to come under pressure.

While it is true that forecasters often see several turns in cycles before one actually occurs, the structural woes of Europe's insurance companies combined with their limited growth prospects does seem likely to keep a lid on share price performance.

The simple fact is that it is extremely hard to see a decent bull market in either bonds or equities, which would give a boost to profits, and it is also tough to imagine underlying economic growth giving a lift to sales volumes.

European banks come in many shapes and sizes, often with significant insurance businesses attached. But the underlying banking business is also looking mature, both cyclically and structurally. While European interest rates are unlikely to rise as fast as their US and UK counterparts, the monetary policy cycle is moving into its unfavourable phase. Banks make lots of money when rates are falling but find it harder when rates are flat or rising. And, like insurance companies, economic growth is unlikely to be sufficient to lift the top line.

In the case of banks, the product that needs volume growth is loan demand. In the UK that particular cycle is well past its peak and in Europe there is little to get excited about, except in one or two of the smaller economies.

Banks and insurance companies can account for as much as 30 per cent of a typical market's capitalisation and a similar amount of total market profits. This is as true in Europe as it is of the US.

If we struggle to identify sources of growth for the profits of financials we struggle to get optimistic about the market as a whole.

The other large sectors are typically pharmaceuticals, oils and, in the US at least, the technology sector. With the exception of oil stocks (which are likely to benefit from the ongoing strength in the oil price), the possibility of upside surprises to profits announcements seems limited. Put simply, growth is increasingly hard to come by.

Microsoft is a case in point. Much has been written about its recent decision - fortuitously trailed in this column a few days before it happened - to return a significant proportion of its cash mountain to its shareholders. Seeing the glass half-empty, some commentators have bemoaned the lack of investment opportunities that the company must now see before it.

More positively, most analysts see it as a sign that Microsoft is simply recognising reality and is maturing properly.

Banks matured decades ago. To achieve anything other than single-digit growth, they either have to exist in a super-charged economy (like the Republic of the 1990s) or merge. The problem with mergers (of virtually any kind) is that there is now a mountain of evidence to suggest that they destroy rather than create value for shareholders of the acquiring company. Some mergers do work, but they are in a minority.

The stock market now believes that a sound rule of thumb is to sell the shares of potential acquirers - hence the fall in SCH's share price once it became apparent that a bid was likely. But, depending on when they bought their shares, some of Abbey's investors were delighted.

Without growth, banks will remain dull businesses, at least from an investor's perspective. Markets have reacted to the first serious European cross-border merger in years with a barely stifled yawn. Nobody seems to think that it will spawn a spate of copycat tie-ups.

Profits growth from domestic or cross-border bank mergers doesn't arise so much from enhanced revenue generation - although this is often claimed by some of the parties involved - but rather from cost-cutting. It is a tried-and-trusted tactic to stick two banks together and strip out costs, usually people-related.

Technology plays a huge role: in the case of Abbey and SCH it is thought likely that SCH's superior technology platform, partly obtained via an earlier deal involving the purchase of another Spanish bank, Banesto, will allow lots of cost savings.

One takeover that was reasonably profitable was the deal involving Royal Bank of Scotland and NatWest in the UK. There, the merging of IT systems was a critical success factor. But the UK regulator now forbids any more big bank mergers.

The moral of the Abbey/SCH deal is that European banks have nowhere to go but cross-border. Unless regulators can be convinced of the merits of domestic deals, the only source - and an uncertain one at that - of meaningful growth is foreign expansion.

It is perfectly possible that many management teams will accept the boring nature of their existence and content themselves with low growth and static share prices.

It is also likely that one or two bank chief executives will get itchy feet and embark on the acquisition trail. The trick for investors is to try and spot the likely targets (and sell the probable buyers).

Possibilities? Speculation has been ongoing about a Citigroup purchase of Deutsche Bank. Investors have long mused about the logic of a merger between Dutch giants ING and ABN Amro. Barclays has also been mentioned as a possible acquirer of more overseas assets.

On the domestic theme, a merger between CSFB and UBS in Switzerland has a lot of commercial logic, as does a tie-up between AIB and Bank of Ireland. Different analysts have different favourites but few are holding their breath. But I fancy that the Abbey/SCH deal may prove more of a catalyst than many of them seem to think.