Making that tractor roar

In the past, European co-operative banks rarely made the headlines in the financial press despite the fact that some of them have begun to rival big commercial banks in terms of economic importance. That is because the attention of the international financial community is mainly on listed companies, including Europe’s big commercial banks. And, although Europe’s biggest co-operative banks have built banking empires similar to those of their commercial peers, their parochialism and shareholder structure meant they had no real need or incentive to talk to the press. These are, after all, the institutions that grew up as the financiers of grass-roots customers, such as farmers, as well as small and medium-sized enterprises (SMEs). Closed shops, they were only accountable to banks that co-operated with them and were also their shareholders.

New paradigm

Anyone who has been reading the financial press recently will appreciate that this paradigm has changed. Since March, Europe’s largest co-operative banks have often had a high-profile in the media and their chief executives have never been so open to talking to the press.

It all began in early March, when French co-operative Banque Populaire said it would merge Natexis, its listed corporate and investment bank (CIB), with Ixis, the CIB owned by French savings bank group Caisse d’Epargne. The new entity, called NatIxis, will be a global player in investment banking and in asset management, with the latter business running at an estimated €500bn.

Although CDC, a government-owned bank that was a 35% shareholder in Caisse d’Epargne, initially opposed the NatIxis project, it relented in May, selling its shareholding in Caisse d’Epargne. In the end, the French government could not resist the chance to help create another banking powerhouse – as it did during the 2003 takeover of formerly state-owned Crédit Lyonnais by co-operative Crédit Agricole.

Surprising step-change

Later in March, DZ Bank, the central bank for German co-operatives, was in the news following an announcement that it would seek a stock exchange listing to finance future foreign expansion.

The announcement took Germany’s financial industry by surprise, as it was previously unclear how consolidation of the overbanked market might proceed. German banking is divided into three pillars: state-owned savings banks (sparkassen) and wholesale landesbanken with 50% of the market; co-operatives with 30%; and commercial banks with at most 20%.

Dieter Hein, an analyst at Fairesearch in Frankfurt, said at the time of DZ Bank’s announcement: “This could change things profoundly. Private banks could buy into co-operatives and, with equity capital behind them, co-operatives could also buy private sector banks more easily.”

Dutch co-operative Rabobank, which has a huge share of the local market, has also been making headlines with its dizzying international expansion. In the past year, it has made acquisitions in Indonesia, China, Tanzania and the US, where it paid $371m for a Californian bank serving smaller retail customers and farmers. Rabobank says such frenetic expansion will continue as it has found a unique opportunity to export its traditional strengths abroad. It is already active in 37 countries outside of the Netherlands.

Banque Populaire’s creation of NatIxis, DZ Bank’s future listing and Rabobank’s foreign expansion are all telling examples of how far European co-operatives have come from their beginnings as ‘country banks’. They not only offer universal banking services, but, in this time of globalisation, are looking beyond their co-operative structures to compete internationally.
International strategies differ
Yet in fulfilling this ambition, the three banks are taking different paths and some are further along than others. Rabobank and Banque Populaire are by far the most international, with the latter active in 68 countries including France. But the French bank’s strategy differs in that by launching NatIxis, it seeks to win over more big corporate clients.
Fellow co-operative Crédit Agricole has already shown how this can be done successfully with its CIB Caylon, which has become a major European player.
Banque Populaire CEO Philippe Dupont even says the NatIxis project could be extended to other European co-operatives “that wish, as we do, to maintain their retail banking business and pool their financing and investment business and their industrial platforms”.
Although Rabobank, which has an international CIB and owns major Dutch asset manager Robeco, is probably not interested in Mr Dupont’s offer, it might entice Germany’s DZ Bank. Unlike the other two, DZ lacks an international CIB and has lagged behind the others in foreign expansion. This is understandable, considering both the German co-operative’s structure and recent history.
Like Banque Populaire but unlike Rabobank, DZ Bank is beholden to the co-operative banks (roughly 1200 in Germany), to which it acts as a wholesaler and which are its shareholders. The 220 members of Rabobank, on the other hand, are not legally independent but all part of the same entity. This greatly expedites decision-making at Rabobank.
Moreover, the profitable entity that is DZ Bank has only been in existence since 2002. That year, current CEO Ulrich Brixner formed the entity by merging SGZ-Bank, a small wholesaler that he led, with the larger but embattled DG Bank. The deal was partly a rescue mission – DG Bank’s corporate loan book began to disintegrate amid a severe slowdown in the German economy. DG Bank’s reputation in investment banking was also tarnished by having brought public several disastrous growth stocks that traded on Frankfurt’s now-defunct Neuer Markt.
German banking expert Professor Wolfgang Gerke says: “It’s true that Rabobank, unlike DZ Bank, can compete with the biggest European banks in all areas of banking, but it got a big head start. While Rabobank was growing its business, DZ Bank was dealing with all of the skeletons in DG Bank’s closet.” It was those skeletons that led Rabobank to call off a planned merger with DG Bank in 2001.
For DZ Bank’s part, deputy CEO Wolfgang Kirsch, who will succeed Mr Brixner in September, says a comparison between his institution and Rabobank is not appropriate. “Rabobank’s strategy [of foreign expansion] is a result of the smallness of the Dutch market. DZ Bank’s situation is different.
“Our strength is the 82 million people in Germany. There is still plenty of potential in the local market,” he told The Banker at DZ Bank’s Frankfurt headquarters in mid-July.
Some of the capital that DZ raises by a listing could, as Mr Hein from Fairesearch points out, be used for further domestic expansion via acquisitions. A precedent for this is the bank’s acquisition in 2003 of Norisbank, a private bank specialising in retail loans, from HypoVereinsbank. In August, DZ Bank sold Norisbank, which has 98 branches in 58 cities, for €420m to Deutsche Bank. DZ Bank made a nice profit on the deal, as Norisbank’s workforce and part of its infrastructure will remain with the co-operative.
Money to expand
However, raising capital for further foreign expansion is the main reason why Mr Kirsch says that DZ Bank is turning to the equity markets. In particular, DZ wants to expand its wholesale operations in Austria and Spain and in central and eastern Europe. To help in this effort, it already has co-operation deals with Banque Populaire and Raiffeisen of Austria. It even has a small cross-shareholding (about 2%) with Banque Populaire – another reason why it might be open to joining the NatIxis project in the future.
Before that can happen, though, Mr Kirsch says he must finish the project that Mr Brixner began: merging DZ Bank with WGZ-Bank, a profitable central bank for co-operatives in North Rhine Westphalia, Germany’s most populous state. “Once this is done, we will have an even more consolidated group, including us, a leasing company, a building society, an asset manager, an insurance company and a consumer finance company. Our structure and business model will then be easy for any investor to understand,” says Mr Kirsch.
Including DZ Bank’s shareholdings in the financial service companies referred to by Mr Kirsch, it made €1.5bn in pre-tax profit last year, an increase of 25% on the year before. By comparison, Banque Populaire (including Natexis) made a pre-tax profit of €2.4bn, up 17% on 2004; and Rabobank made €2.7bn, up 4.4%.
According to German press reports, the prospects for a successful merger between the two co-operatives have never been this good. They attributed this to the fact that Mr Kirsch, a mild-mannered executive who joined DZ Bank from Deutsche Bank in 2002, gets along better with WGZ-Bank CEO Werner Böhnke than does Mr Brixner. Mr Kirsch did not comment on this, agreeing only that the prospects for a merger are excellent.
In any event, Mr Kirsch stresses that any future stock exchange listing will be partial, owing to the bank’s traditions and business model. This is confirmed by Christopher Pleister, president of the association for German co-operative banks, which are DZ Bank shareholders. “If a stock exchange floatation is to take place, the relationship between the local banks and the central [co-operative] bank plus its financial services arms will not change,” says Mr Pleister, who also became president of the European co-operative banks association on June 30.
Limited ambitions
Despite DZ Bank’s proposed listing and the rise of NatIxis, Mr Pleister does not believe that these co-operatives are beginning to act like some of their big commercial peers. “Co-operative banks do not have the ambition to become great powers. Their focus will always be on their home country. But what is happening is that they are trying to optimise their business model and competitiveness,” he says.
His remarks are echoed by Mr Dupont in Paris, who says that the planned listing of NatIxis – 32% is being offered as a free-float – is not a departure from its previous business model or culture. “The access to equity markets provided by NatIxis in the future is only one of the drivers of future growth we wish to use. Developing the member-shareholder base of the Banque Populaire banks is also a means of supporting our expansion,” says Mr Dupont, adding that using the bank’s investment grade credit rating is a third way of financing expansion.
His latter point is also true of DZ Bank and especially Rabobank, which has a triple-A credit rating.
Probably because of the importance of the NatIxis project, Mr Dupont cannot be drawn much on where the bank plans to expand internationally. The only areas he names are eastern Europe and Algeria. He also mentions Coface, the Banque Populaire arm that specialises in credit insurance and credit management for companies, as a “key driver of growth”.
Counting on the war chest
According to Mr Heemskerk, Rabobank has no need to tap the equity markets to finance its ambitious growth at present. The bank can muster an annual war chest worth €2.5bn, he says, part of which comes from cash-flow and part from debt issuance to members of its group and outside investors.
True to its strategy of building a global food and agricultural bank, about €1bn of the war chest is to be spent on acquisitions in what Mr Heemskerk calls “very developed agricultural areas”, namely the US, Canada, Australia and New Zealand. The rest is to be divided between less developed areas like eastern Europe as well as Brazil, China, India and parts of Africa.
Since The Banker interviewed Mr Heemskerk in late July, Rabobank has paid €845m to acquire Bouwfonds, a real estate fund provider, from Dutch commercial bank ABN AMRO. Yet significant expansion in western European countries other than the Netherlands is not on the cards.
“If we were to open up in such overcrowded markets as France and Germany, it would be very expensive and the question would be, where is the added-value that we can provide?” says Mr Heemskerk.
Fear of corporate raiders
Although Rabobank is well-financed, Mr Heemskerk is eager to give another reason why the bank is not amenable to a stock exchange listing. “It’s the extremely aggressive way that hedge funds operate and how they try to enforce their will on the strategies of [listed] companies. And they do it not because of a deep and long-term interest in these companies but because they want to make a quick killing and then run away. We never want to be in the hands of a private equity investor,” he says.
“I admit that these private equity investors can sometimes be of help, especially when it comes to propping up distressed companies. But the problem is that they are applying their short-term business model to healthy companies,” he adds, citing last year’s battle between German exchange operator Deutsche Börse and hedge funds led by London-based TCI.
The hedge funds prevailed by ousting Werner Seifert as Deutsche Börse’s CEO and getting the firm to pay out its huge cash pile to investors. Deutsche Börse had wanted to use the money to finance a takeover of the London Stock Exchange.
Asked what could be done to protect listed companies against such corporate raiders, Mr Heemskerk replies that, although they cannot be banned in free markets, “governments should at least stop their ability to work together”. In the case of Deutsche Börse, German financial services regulator BaFin did try to establish that the funds acted in concert. However, its investigation failed to produce conclusive evidence.
Judging by their profitability of late, Banque Populaire, DZ Bank and Rabobank seem to have found strategies that suit them. They insist that they will remain independent in the immediate future. Mr Dupont dismisses the idea that the launch of NatIxis is a prelude to an all-out merger between Banque Populaire and Caisse d’Epargne, which itself is in the hands of co-operative banks.
Consolidation will come
Mr Heemskerk, on the other hand, says that sooner or later consolidation of European banks will begin in earnest and when it does, the fragmentation of the co-operative sector will be a thing of the past.
“Consider that we now have a European car industry and a European steel industry. Cross-border mergers have not really played a role yet but they will come, whether in three, five or 10 years. And when the consolidation begins, Rabobank will have to count its buttons and see who its friends are,” he says.
Rabobank’s friends might be among the six big co-operative banks with which it is already doing some business. As an example, Mr Heemskerk says the bank shares a leasing product with DZ Bank and Crédit Agricole. That is on top of DZ Bank’s standing deals with Banque Populaire and Raiffeisen.
Europe’s big co-operative banks are, in other words, drawing closer together despite claims by some of their CEOs that they will remain independent of one another. This could mean that when the consolidation Mr Heemskerk speaks of takes place, the three co-operatives that have made headlines in past months may do so again.