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ArchiveMarch 2 2000

Take Your Partners

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"You have to be at the ball when the dancing starts, or you risk being left without a partner," insists Pedro Uriarte, vice chairman and chief executive officer of Banco Bilbao Vizcaya Argentaria, Spain's second largest bank, as he contemplates merger and acquisition possibilities in Euroland.

This view is shared by Banco Santander Central Hispano, Spain's largest bank by assets and Europe's third largest by market capitalisation, which shares the distinction with BBVA of having one of the highest returns on equity in the business in Europe (18.5 per cent and 21.9per cent, respectively).

Both banks have set up a number of alliances, including cross-shareholdings, to ensure they do not end up as wallflowers. Regulatory, fiscal and political barriers are an impediment to full-blown mergers in - at the very least - the next couple of years. However, as those barriers are dissolved, the Spanish banks are betting that their future lies in pan-European banking group, with a bias towards Southern Europe and Latin America.

"The bigger you are and the more friends you have all over the world, the more possibilities are open to you," says Alejandro Ruyra, an analyst at AB Asesores Morgan Stanley Dean Witter. BSCH stole a march on its rival last month by announcing a strategic alliance with old ally Société Générale, France's second largest bank, which vice-chairman and chief executive officer Angel Corcóstegui has called "a second-generation alliance".

This involves setting up joint ventures in five areas: asset management; specialised financial services; wholesale and investment banking; retail banking; and Internet banking and brokerage. To cement the deal, SocGen will buy up to 3 per cent of BSCH, while the Spanish bank will increase its stake in the French bank by up to 7 per cent. But will this deliver profits, unlike the largely symbolic cross-shareholdings that have been the norm in the European Union? BSCH certainly hopes so.

Mr Corcóstegui sees synergies in a number of areas, such as SocGen's strength in equity derivatives and Asia, while the Spanish bank can deliver a large branch network and Latin American exposure. He is looking for the venture to be profitable by next year. BSCH is already in talks with some of its other partners on reaching similar agreements. This includes Sanpaolo IMI, Italy's largest bank, and Germany's fourth largest, Commerzbank. In addition, playing the role of loyal shareholder, the Spanish bank provided finance for Royal Bank of Scotland's successful bid for NatWest. But when it comes to mergers, co-chairman Emilio Botín is adamant. "Fusing with other European groups is a cock-and-bull story,'' he recently said. Analysts note, however, that there was no time frame attached to this forceful statement.

There are too many unknown factors at this time for plans to be made, but the bank has positioned itself advantageously, ready to sit down in a few years' time and see how much further it is worth going. Meanwhile, BBVA, Europe's second largest bank by market capitalisation, has a 3.8 per cent stake in Crédit Lyonnais, France's sixth largest bank, and 10 per cent in Banca Nazionale del Lavoro, Italy's sixth largest bank. It awaits a decision by UniCredito Italiano, Italy's third largest bank, on what sort of an alliance is possible, leading to a proposed merger in 2002. BBVA has identified 99 projects that it believes could be taken forward over the next few years with UniCredito, although Mr Uriarte said that if that situation did not work out "there are other possible partners and they do not necessarily have to be UniCredito, nor necessarily in Italy".

Analysts are sceptical about the value of the planned 50/50 merger unless BBVA ended up as top dog and could impose rigorous cost cutting. The hold-up in the planned merger is the fact that UniCredito wants a merger of equals, despite a much smaller market capitalisation than BBVA. This obstacle could be overcome if UniCredito fulfils its goal of buying Banca Nazionale del Lavoro, conditional on the Bank of Italy giving it the go-ahead. But this might delay any cross-border plans as the Italian bank concentrates on absorbing BNL. In Portugal, BBVA has a minuscule market share of about 1 per cent, far behind its rival BSCH with about 12 per cent.

Mr Uriarte says the bank has alternatives in Portugal, ranging from organic expansion to acquisition or a strategic alliance. But Steve Hussey, director of financial institutions at rating agency Fitch IBCA, thinks the options are more limited. "In Portugal, BBVA will have to buy a bank. They may wait for further consolidation and then jump in," he says. Banco Pinto & Sotto Mayor has been mooted as a potential purchase, but Mr Corcóstegui said he might be interested as well. BSCH wants to increase its market share in Portugal to 15 per cent. Last year, the Portuguese government incurred the wrath of the European Commission by blocking the planned alliance with the Champalimaud group.

The dispute was settled when the authorities agreed to divide the group between BSCH and Caixa Geral de Depositos, a state-owned financial institution expected to sell on assets assigned to it, including Banco Pinto. Increasing their attraction to potential European partners is the fact that both Spanish banks have about a fifth of their assets in Latin America (see page 44), where they are looking for higher growth than in the more mature markets of Euroland. They are both well aware that they have to be at the ball to be invited to dance. The next step is "living together for a few years. If things work out, then marriage. But you have to be careful before taking that step since a Catholic marriage is indissoluble," says Mr Uriarte, only half in jest.

By taking shareholdings in non-domestic banks and doing joint projects, the big Spanish banks are hoping they will emerge as winners in the European marriage stakes in a few years. Meanwhile, they are busy settling into their Spanish marriages and, if 1999 results are any indication, they are enjoying connubial bliss. BSCH delivered full-year profit up 26 per cent to Pta262.1bn (e1.58bn) and said it was looking for 25 per cent growth this year. The bank, formed last January by the merger of Banco Santander and Banco Central Hispano, benefited from consumer spending and low interest rates. Net interest income rose 7.8 per cent while commission income hit almost 12 per cent as Spaniards bought more mutual funds and other financial instruments.

Non-performing loans (NPLs) as a percentage of total loans rose to 1.97 per cent from 1.86 per cent on the back of the bank's exposure to Latin America, where it has about 25 per cent of its assets. The merger has resulted in costs as a percentage of income falling to 57.7 per cent from 62 per cent a year ago. Management wants to lower it to about 45 per cent via further branch closures and redundancies. BBVA, meanwhile, reported a 23 per cent rise in 1999 profit to e1.75bn and is looking to double that in 2002. The bank, formed last December when Banco Bilbao Vizcaya acquired Argentaria, saw net interest income rise 4.4 per cent while commission income rose 16 per cent.

Its NPLs fell to 1.8 per cent from 2.3 per cent a year earlier as it cleaned up its Latin American book. The bank has 18.5 per cent of its assets in the region. BBV's strengths in corporate and retail banking complement Argentaria's strongholds in public-sector, mortgage lending and banking services to lower-income individuals, says Standard & Poor's, which reaffirmed a rating of AA- for the merged banks. Although it is early days, "the banks are both efficient and technologically savvy, so there hasn't been a cultural clash", says Mariano Colmenar, banking analyst at CSFB. BBVA is looking for cost savings of e39.4m in two years with branch closures and redundancies as it turns five brands into one brand by 2001.

Within 15 months, it expects to have completed the merger. Their domestic operations - each has about a 20 per cent market share in Spain - provide the backbone for both banks' ambitions in Europe. "They are two of the strongest banks in Europe, more profitable than most because margins are quite wide in Spain - as well as in Latin America - and they are quite efficient in terms of costs,'' says Mr Hussey. The question is whether this much-vaunted efficiency can be applied to the European banks they are looking to merge with. No one doubts it is needed. "There are a lot of efficiencies and cost savings yet to be pulled out of European banks,'' said Jesús Martinez, director of financial institution ratings at Standard & Poor's in Madrid.

However, a merger of equals, which is what many of the sketched out plans foresee, will stunt Spanish knife wielding, making the value of cross-border mergers far from obvious. Joint ventures of the sort BSCH announced with SocGen may prove to be as far as the banks should go, even as regulations and taxes become more homogenised in Euroland. "It is very difficult to say what Europe will look like in five to 10 years,'' says Mr Corcóstegui. But both banks are practising their waltz steps just in case.

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