TEL AVIV- Declining revenues as the period of negative interest rates is prolonged further are likely to prompt European banks to merge, a senior official at S&P Global Ratings said on Monday.

Luigi Motti, senior director at S&P, said that while interest rates were initially expected to start rising in 2019 and 2020, rate increases are now not seen until 2022 at the earliest and will be gradual even then.

Banks across Europe have tried to compensate for lost net interest income over the past decade by slashing costs, closing branches and shedding more than 20% of their workforces. But Motti said that had not been enough to completely offset the drop in revenues.

"We see a rationale for more consolidation in Europe," he told an S&P conference in Tel Aviv, adding that mergers would only be within countries and not cross-border since the European Union's long-planned banking union is not yet in place.

"By merging two mid-sized banks you create the potential for cost synergies, which is right now probably the most effective way to deliver value to the shareholders. And second, you create the economies of scale at the time it is really needed by banks," Motti said.

He noted that while the past decade has been fairly good to European banks, with credit rating upgrades outweighing downgrades as banks improved their balanced sheets, "the picture is now changing" on the heels of global trade tensions.

Another reason banks need to merge is to invest in digital technologies and compete better with financial tech firms.

Motti said banks were facing a number of risks through 2021, such as softer consumer demand, impacts from weaker exports and Brexit.

S&P believes there will be a deal on future relations between London and Brussels, "but if that's not the case obviously that would have negative consequences for the United Kingdom and also for the rest of Europe," he said.

Another significant risk would be if banks don't respond well to their profitability challenges.

"So, if we look at what banks need in terms of efficiency we're talking about mergers, but the reality is that banks are starting to run short of strategic solutions for the type of challenges that they're facing," Motti said.

(Reporting by Steven Scheer; Editing by Catherine Evans) ((steven.scheer@thomsonreuters.com; +972 2 632 2210; Reuters Messaging: steven.scheer.thomsonreuters.com@reuters.net; Twitter: @StevenMScheer))