A flurry of cross-border deals is unlikely to follow SCH, Abbey

Santander Central Hispano appears to have won the battle for Abbey National almost without a fight. With HBOS abandoning its bid and EU approval under his belt, SCH’s chairman Emilio Botin can feel justly proud of pulling off the largest European cross-border bank deal ever. But is the Abbey deal a one-off, or is it the start of a flurry of deals and the long-awaited consolidation in the European banking sector?

While stiffer competition, higher costs of regulation and declining profitability in many areas are pushing banks towards consolidation, the scarcity of cross-border deals in recent years demonstrates the current reality – viable deals are very hard to achieve.

According to Steven Davis in his latest book, Excellence in banking – revisited: “All the evidence in Europe (so far at least) is that cross-border transactions add only marginal revenue synergies. Single-digit anticipated revenue increments would seem to reflect the similarity of bank product offerings, as well as the unique nature of each country’s retail structure.” SCH is claiming e450m in synergies at Abbey, but while IT makeovers and redundancies can bring results, the European experience in this area has not been good.

And then comes the even more difficult issues of politics and nationalism. Portugal tried in vain in 1999 to block SCH’s purchase of the local Champalimaud group, many countries push the “national champions” policy, discouraging prospective foreign buyers and some authorities, such as the Bank of Italy, deliberately shun foreign intervention, preferring to push domestic consolidation.

Banks’ perceived role as both enterprises and social institutions highlights the influence of politics, and reflecting this problem, European finance ministers recently agreed to a study to assess claims that national politics were hindering cross-border banking mergers.

Clearly different tax rules, consumer protection standards, labour laws and cultural characteristics make cross-border transactions more problematic than domestic deals. And this is before nationalist sentiment comes into play. Would the Spanish authorities genuinely accept SCH becoming part of a British bank if Royal Bank of Scotland put in a bid for it?

If European banking is to progress, and stronger, more efficient institutions are to emerge, more consolidation needs to take place at both the domestic and cross-border levels. The SCH/Abbey deal is a good start but few similar deals can be expected to follow unless some of the political obstacles are removed and the European Commission helps to provide a more merger-friendly environment.