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Western EuropeFebruary 3 2004

Cross-border pioneer fights on

Dexia is the result of a pioneering cross-border merger in Europe. Its experiences demonstrate the difficulties of executing an international strategy across a region within which regulations differ, writes Brian Caplen.
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The most frequently asked question in international banking is: when will there be a major cross-border merger in Europe? Usually the answer is that the European market is not sufficiently integrated for it to make economic sense. The answer should be: it has already happened, look at Dexia.

Dexia is “the first real cross-border merger between European banks”, says its chairman and CEO, Pierre Richard, referring to the 1996 merger of Crédit Local de France and Belgium’s Crédit Communal – two institutions that specialised in municipal finance – that created Dexia. “It’s the only true European bank, not only because of the merger, but because of the income breakdown by country.”

Only 45% of the bank’s income comes from Belgium and France, with 30% coming from Luxembourg and 25% from the US following the 2000 acquisition of Financial Security Assurance (FSA), a specialist in the insurance of bond issues.

But being a cross-border European bank has not been without its problems: there are difficulties in the Netherlands related to the Legio Lease product, challenges in explaining the bank’s strategy to the media and shareholders, and all the usual foreign investment problems to overcome, such as finding the right structure and coping with different regulators. At the same time, Dexia must pursue a strategy of social responsibility and sustainable development.

Tackling issues

With all this on his plate, it is small wonder that Mr Richard makes a feisty interview candidate who prefers to do the talking rather than engage in a dialogue. At least, however, he does not duck the difficult issues but tackles them head on.

“Investors say Dexia is a strange animal and I am not sure if this is a positive or a negative. We don’t say we are better than other banks, only that we are different,” he says.

One aspect of this difference is that the legal registration of the holding company is in Belgium, the bank is listed in Paris and Luxembourg as well as Brussels, while its headquarters is split between Paris and Brussels.

Mr Richard, a Frenchman, lives in Paris and spends two to three days a week in Brussels. A graduate of the elite École Polytechnique, he was a senior civil servant who became chief executive of Crédit Local de France in 1987. With the creation of Dexia Group in 1996, he became co-chairman with François Narmon. After reorganisation in 1999, he became group chief executive.

Perhaps the reason why Dexia has not registered in many people’s minds as a European cross-border merger is that it is not a universal bank but one that specialises in three main areas: public finance, retail and investment management.

In public finance, Dexia ranks number one in Europe and the acquisition of FSA in the US makes the bank a world leader in credit enhancement. In the third quarter 2003 results, the “outstanding performance of the public finance division” – to quote a BNP Paribas research report – helped the bank show a net profit of E343m, up 95% year-on-year, and above expectations.

Mr Richard says growth prospects in this sector remain strong due to the European trend (except in the UK) toward devolving power to local administrations. This gives Dexia more opportunities to lend to municipalities and to assist them in managing debt portfolios. The expansion of the EU to include 10 new countries will create opportunities in public finance.

Retail and investment management have not been as strong as public finance. BNP Paribas refers to a “resiliency of revenues in retail banking, but also a less convincing performance in investment management services”. In its morning news and comment of November 21, 2003, Cheuvreux, the stock broking arm of Crédit Agricole, comments on “a disappointing performance in retail financial services” and notes “still no improvement in investment management services”.

Retail giant

In the retail sector, Dexia acquired the Artesia Banking Corporation in Belgium in 2001 and became the second-biggest bank in that country. It also has a strong retail position in Luxembourg through Dexia BIL. The bank would like to have a retail operation in France, says Mr Richard, but only if one became available at the right price.

Mr Richard acknowledges that there are few cross-border synergies within retail – which explains why more mainstream European banking mergers have not been attempted – and says: “We have no precise approach. It would be a good thing for Dexia to have a retail network in France but it is not compulsory and, so far, we have not found the right one. An alternative would be a partnership with a retail bank to allow us to distribute our savings and insurance products.”

In investment management services – private banking, asset management and fund administration – a partnership at some stage is probably critical because certain areas of the business, such as custody, have evolved into low-margin, high-volume type operations.

Generally, however, Mr Richard has to admit that acquisitions are not uppermost in his mind: “Right now the market would not accept a new flow of acquisitions from us,” he says. “So at the moment, as we are producing excess capital, it is going into share buy-backs. The market criticised us for making too many acquisitions but, overall, while we made some mistakes, the strategy has been positive for the group.”

The undoubted soundness of the FSA purchase was difficult enough to explain to the market; even more controversial has been its purchase of Legio Lease in the Netherlands. This product was sold by Banque Labouchere, acquired by Dexia in 2000 and has been embroiled in a mis-selling scandal. “It’s a delicate issue, especially in terms of image, but we think we have managed it well. We took a big provision of E500m at the end of 2002 and so far we have not had to increase it,” says Mr Richard.

He says of future acquisitions: “We must be patient until the market is more confident.”

What about an institution acquiring Dexia? “We prefer to remain independent but we must show the market that we can remain highly profitable. I am a strong advocate of good dividends on a permanent basis. Our shareholders are not so concerned about short-term fluctuations in the share price,” says Mr Richard.

Juggling regulations

In executing Dexia’s international strategy, Mr Richard has had to cope with the problem of differences in regulatory standards that by now ought to be a thing of the past in Europe.

“Dealing with regulatory issues is a significant part of our costs and is made worse by having to comply with several regulators in Belgium, France and Luxembourg,” says Mr Richard. “For example, under French rules Tier 1 capital should be 9%, while under Belgian rules it is 10%. We would like to have the same rules everywhere – and this is not because I am a French centraliser but because of the problems we face. There needs to be a European financial services authority just as we have the European Central Bank.”

The other important component of Dexia’s strategy is sustainable development. Mr Richard explains that, because of the group’s history – both Crédit Local and Crédit Communal were state-owned institutions – there is a tradition of serving the public interest as well as making a profit. With its public finance lending, Dexia tries to promote projects that are environmentally sound and the bank is a leader in financing windmill power.

On the fund management side, Dexia is a leader in promoting ethical funds. While these initiatives make good environmental sense, the bank believes they will also bring profits and help to restore its image after the battering it has taken in the past year or so.

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