As mergers slow down, cross-border skirmishes look less attractive, and banks face the new challenges that the Internet brings, consolidation is at the forefront of banks’ strategies, reports Stephen Timewell.
The past year has witnessed the start of a revolution in financial services and, while many banks have recovered from the depths of the 1998 crises, the real challenges lie ahead as the impact of the Internet begins to take effect in a variety of unimagined ways.
In some respects, the past year could be viewed as the calm before the storm. Results have been broadly positive but, while the first major wave of consolidations has taken place, the banks that remain are now being forced to reassess their fundamental strategies amid the weight of new competition, deregulation and globalisation.
Consolidation remains a continuing theme in this year’s Top 1000 world banks but there is growing concern as to whether mergers deliver the expected benefits and whether cross-border deals are feasible, particularly in Europe, where cultural considerations are seen as barriers to success. US rating agency Standard & Poor’s notes that, in 1999, European domestic bank mergers were valued at e128.6bn, versus e21.4bn for cross-border deals.
In the US, the plethora of bank mergers over recent years seems to have slowed down considerably due to problems at banks, such as Bank One in Chicago and First Union in Charlotte, forcing chief executives to concentrate on digesting existing acquisitions rather than looking further afield.
And the fiasco surrounding the proposed Deutsche Bank/Dresdner Bank deal earlier this year has cast a shadow over certain other mergers. Nevertheless, consolidation is far from over as many of the world’s markets remain overbanked and those with clear strategies continue to push ahead.
The two Spanish giants, Banco Bilbao Vizcaya Argentaria (BBVA) and Banco Santander Central Hispano (BSCH), both the product of domestic mergers in 1999, have in recent weeks acquired two large Mexican banks – BBVA taking Bancomer against a domestic bid, and BSCH taking Banca Serfin (see page 56).
This Spanish push into Latin America highlights what can be done but BSCH co-chairman, Emilio Botín, also notes that the acquisition route is not always possible. “It is almost impossible for cross-border mergers in Europe to create true shareholder value if they are among equals.” In relation to Europe, he adds: “The opportunities for cost savings exist but are clearly inferior to those available within the same market. It is also clear that the major obstacles represented by different business cultures and different languages are important and greatly magnified. Very strong management is needed to guarantee the success of cross-border mergers.”
In recent months, however, HSBC Holdings has demonstrated that cross-border deals are possible, even in Europe. Following the absorption late last year of Republic New York, HSBC completed the acquisition of Crédit Commercial de France (CCF) in April in a friendly, smooth deal. This is seen as a true watershed given the problems in France last year between Banque Nationale de Paris, Paribas and Société Générale, which eventually resulted in BNP Paribas, now 14th on our listing.
Although consolidation has failed to change the top of the (Tier One capital) listing – with the top three institutions, Citigroup, Bank of America and HSBC Holdings maintaining the same places as last year – the Top 1000 is far from static. The Japanese banks, which had dominated the top of the table until recently, have witnessed a revival, on the back of improved profitability, and the strong appreciation of the yen (against the dollar), 13.75 per cent year-on-year.
Bank of Tokyo-Mitsubishi led the charge, climbing up to 4th from 7th last year and Dai-ichi Kangyo Bank jumping to 6th from 16th. This year, four Japanese banks make the Top 10 compared with only two last year.
And following a number of proposed mergers (see page 151), Japanese banks could move further up the listing in years to come but, as has been seen with the recent decision by Asahi Bank to withdraw from its merger with Sanwa Bank and Tokai Bank, future outcomes are far from certain.
The Japanese surge has shifted the weighting within the Top 25 Tier One listing, with Japan providing nine banks, the US four (including three of the top five), China three (including Agricultural Bank of China), followed by France, Germany and Switzerland with two banks each, and the UK, the Netherlands and Spain with one.
In terms of total assets, Deutsche Bank again remains the undisputed world leader, posting total assets of $843.8bn, well ahead of the nearest bank, the US’ Citigroup (the Tier One winner) on $717bn. But while Deutsche has only $17.4bn of Tier one capital, compared with Citigroup’s $47.7bn, Deutsche maintains a BIS capital ratio of 12 per cent compared with Citigroup’s 12.43 per cent.
Citigroup remains the most profitable bank in the world in regard to pre-tax profits, amassing a huge $15.9bn total in 1999, 72.1 per cent up on the previous year. On the back of the booming US economy, both Bank of America and Chase Manhattan also showed profit growth in excess of 40 per cent. In fact, the strong US bank performance can be shown by the fact that the four US banks in the top 25 world banks (Citigroup, BoA, Chase and Bank One) accumulated $41.5bn in pre-tax profits which amounts to 42.1 per cent of the entire profits for the top 25 banks ($98.6bn).
The previous year, given the massive losses posted by the Japanese banks (Sumitomo Bank was the largest lossmaker at $6.3bn) pre-tax profits were only $37.8bn, of which the four US banks contributed $27.8bn, or 73.5 per cent. Overall, while consolidation is diminishing the number of banks in certain countries, the US banks are increasing their number in the Top 1000. This year, US banks comprise 199 of the total compared to 182 last year and 154 the previous year.
Japan’s total this year is 116, much the same as previous years, while third place Germany has dropped from 87 to 84 banks, and fourth place Italy has fallen from 64 to 58. Looking at the overall Top 1000 totals – the strong growth in pre-tax profits of 77.6 per cent to $309.8bn, along with 6.5 per cent growth in Tier One capital and 3.4 per cent total assets – all these measures suggest a healthy banking sector.
And with the world economy expected to grow by over 4 per cent this year and next, according to the IMF (see page 16), the industry could be seen to be in a robust phase. But not all bankers are so sanguine. Besides being wary of predators, bankers face the double pressure of improving shareholder value while developing a flexible strategy to meet the changing demands of the new technology.
“I don’t think we have scratched the surface of what the Internet will do to financial services,” says Jonathan Bloomer, group chief executive of the UK’s Prudential, the owner of Internet bank Egg, which has attracted more than one million customers in its first 18 months and transformed the expectations of the UK retail banking market.
Although Egg is yet to turn a profit, and is unlikely to do so before 2004, it launched a successful IPO (initial public offering) in June and has convinced investors and customers alike of its strategy, dragging customers away from traditional banks. Mr Bloomer plans to add a “shopping mall” to Egg’s range of services, adding: “We want to act as a trusted guide in a noisy world.”
Egg, like First-e and the hundreds of Internet operations established around the world in the past year, is transforming attitudes and forcing change. A UK banker in the latest CSFI (Centre for the Study of Financial Innovation) report, Banana Skins 2000, notes: “This is a period of extremely high strategic risk for the industry.
There is no question that the Internet will result in big winners and losers, and the business models that are currently being developed will weed out the industry in a big way,” (see page 12). Changes are not only taking place in retail but also in the wholesale area where new e-technologies are revolutionising B2B (business-to-business) relationships.
Notes Russell Collins in an Arthur Andersen report, Converging on an e-business future: eB2B in the Financial Services Industry: “While financial services institutions are considering the possibilities of eB2B, they must be aware that cutting-edge new entrants are incubating new businesses, creating new eB2B solutions and accelerating new business models that will give rise to new financial companies in this space. To compete with these new entrants, established players will need to examine the way they do business versus the way they need to do business.”
While the Arthur Andersen research asserts that no single model ensures e-business success in eB2B “as financial institutions converge on the eB2B future from different directions”, there is a similar diversity of approach in the retail sector. The only thing that is certain is that banks cannot stand still and watch their customer bases disappear. More radical change is on the way as the real impact of the new economy takes hold. Banking is changing dramatically. Banks will have to change, too, if they intend to stay in business.