European banks are having to consider carefully what to do with excess capital, since cross-border acquisitions are proving tricky.
To buy or to buyback is the question facing many of Europe’s top banks as strong performances leave them worrying over what to do with excess capital. And with Citigroup analysts estimating that European banks will produce over E80bn in surplus capital in the next three years, the issue is not going away.
For many, the acquisition route is problematic. As rating agency Fitch recently noted, cross-border consolidation in Europe is still fraught with regulatory, fiscal and cultural barriers, not to mention a lack of any realistically achievable synergies.
Unicredito Italiano, for example, which has built a new division in central Europe, has been stymied in recent acquisition efforts and has turned its focus to organic growth as a key management priority. It has also insisted on not wanting to have excess capital and has embarked on a one billion shares buyback programme with a strategy of stabilising its Tier One capital at 6.8%, below the current 7% level.
For Unicredito, which improved its return on equity to 17.7%, one of the strongest in Europe, the preference in the current conditions is to keep flexible and avoid both dilution of returns and unprofitable acquisitions.
For BNP Paribas there have been a few more options in its approach to surplus capital. Its recent $1.2bn cash purchase of North Dakota-based Community First Bankshares demonstrates its ability to buy useful network expansion in the US at reasonable multiples. At the same time, BNP is running a E1.5bn share buyback, which helps deal with its excess cash.
Among the UK banks, HSBC did not announce any share buybacks, nor did Lloyds TSB or Royal Bank of Scotland. With a genuine global franchise, HSBC is likely to continue to broaden its global network with acquisitions such as the Bank of Bermuda late last year.
But for Lloyds the acquisition outlook is unclear and analysts suggest uncertainties over accounting and regulation may account for its lack of buybacks. RBS described its potential for buybacks in 2004 as a “maybe”, but like BNP in the US, it also has considerable potential in building its US network.
Going forward, European banks face tough choices. With domestic consolidation expected to be limited to Germany and Italy, and cross-border acquisitions out of contention, banks will have to think seriously about how they use their excess capital. Wasting hard-won returns on frivolous purchases could be extremely dangerous.
