French government efforts to encourage mergers between state-owned and private banks are paying off, says Jan Wagner. But Germany’s Sparkassen are resisting efforts to get them to follow suit.

Sanofi-Synthelabo’s takeover of Aventis, its larger Franco-German rival, is making headlines not just because the merger is one of the largest ever in the pharmaceuticals industry. The deal is also big news because of the French government’s unabashed involvement in it. Eager to create a national champion in pharmaceuticals, the government lobbied Sanofi hard to improve its takeover bid so Aventis would remain in French hands.

The merger is set to take place this month, along with another, which – though also semi-engineered by the French government for the same purpose – has had far less attention. Caisse d’Epargne, a group of French savings banks with a co-operative shareholder structure, is merging with Caisse des Dépôts et Consignations (CDC), a state-owned commercial bank and asset manager.

The terms of the deal are complicated but, basically, Caisse d’Epargne is paying E3bn to take over CDC. The two banks will then form a new entity called Caisse National des Caisses d’Epargne (CNCE), in which Caisse d’Epargne will have a controlling 65% stake and CDC the remaining 35%.

Once completed, the deal will transform Caisse d’Epargne, a second-tier and rather parochial institution, into the nation’s third-largest banking group behind first-ranked Crédit Agricole (CA) and second-ranked BNP Paribas. The new bank will have 50,000 employees and E19bn in shareholders’ equity.

Generous dowry

Even more dramatic is Caisse d’Epargne’s emergence as a global player in asset management as a result of the tie-up. This is thanks to CDC’s exceptional dowry, which includes Ixis, an investment bank and asset manager active in 10 European countries as well as the US, Japan, Singapore and Australia. In all, CDC Ixis boasts more than E400bn in assets under management, E120bn of which come from its takeover in 2000 of US asset manager Nvest. Indeed, the state-owned bank’s biggest asset management operation outside of France is in the US, where it has offices in eight cities.

The tie-up between the two banks follows decades of close co-operation, in which CDC acted as a custodian and manager for assets brought in by Caisse d’Epargne’s family of 31 savings banks in France. It also marks CDC’s official privatisation, signalling that, as with Sanofi and Aventis, the French government has done what it can to help create a national – and, to some extent, an international – champion.

“There’s no doubt that the political wish to create another industrial champion is one of the reasons behind the merger between Caisse d’Epargne and CDC,” comments Wolfgang Althaus, a partner at Munich law firm Dechert and an expert on European banking law. “It shows that while the German government urges the creation of a banking champion, the French government actually creates one,” he says, referring to a recent appeal to this effect by German chancellor Gerhard Schröder.

National focus

Judging by appearances, however, it does not seem to have dawned on Caisse d’Epargne that it will be not only a big national player but also an international one. For one thing, the bank’s chief executive, Charles Milhaud, speaks only French rather than the international business language of English.

Speaking to The Banker from his Paris office, Mr Milhaud went to great lengths to play down the international aspect of the merger, stressing that it was chiefly designed to create a “universal bank” to compete better in the domestic market. Currently, Caisse d’Epargne has a 12% share of the French retail market, putting it in second place behind CA, which gained a 25% share after acquiring Credit Lyonnais, another former state-owned bank, in 2003.

“We are and will remain a retail bank, expanding our activities to include corporate and investment banking as well as asset management,” Mr Milhaud says. “We don’t intend to neglect our values and history. This means we will not play the investment banking and asset management cards against the retail one. We are just building on our traditional domestic retail banking base.”

Beyond merging with CDC, Caisse d’Epargne’s building of a universal bank to bolster its domestic position has entailed several acquisitions. Last year, it bought a controlling stake in the French arm of Italian bank Sanpaolo IMI and all of Entenial, a real estate bank.

Caisse d’Epargne and CDC also have a sizeable share of the domestic insurance market via their ownership of CNP Assurances, a leading life insurer. Mr Milhaud confirms French press reports that his bank would co-operate with investment bank Lazard to provide share underwriting for French companies with a turnover of more than E500m. All pieces of the universal bank puzzle are in place.

Sticking to his line that the merger with CDC must be seen in this context, Mr Milhaud is reticent about giving details of the new bank’s future international strategy. On future plans for CDC Ixis, he is more forthcoming: “It is already well represented internationally and is concerned with developing its business in niche markets. We don’t have any plans to change this strategy.”

His reluctance to say much about the group’s international strategy is understandable. He has implemented the plans he unveiled in 1999 to turn Caisse d’Epargne into a universal bank and he now faces the big challenge of consolidating divergent businesses under one roof. “We will not remain indifferent to the possibility of further expansion, but for the next three years we have decided to focus on consolidation of the group,” he says.

Jean-Baptiste Bellon, a bank analyst at Deutsche Bank in Paris, says that Mr Milhaud and his board colleagues do not want to take on more than they can handle. “Caisse d’Epargne is wary of foreign expansion, as it does not necessarily possess the know-how for such an undertaking. It doesn’t want to get itself into something it doesn’t understand or where it’s not sure of decent returns,” he says.

Even so, Mr Bellon says that possible areas of foreign expansion of CNCE’s retail arm include the French-speaking areas of Africa. Asset manager CDC Ixis is also probably eyeing opportunities in China and other emerging markets, he says.

Fortunate standing

From an economic perspective, Mr Milhaud is under no pressure to go any further than he has already. Heading into the merger with CDC, Caisse d’Epargne’s fortunes are at a high. According to last year’s results, net profit totalled E1.1bn, up 17% from the previous year. Caisse d’Epargne’s return on equity was 11.3%, perhaps not bad by French standards but low by international standards. Similarly, its cost-to-income ratio, at 70%, was better than several of its French rivals but still too high to be truly competitive.

With a Tier 1 capital ratio equalling 11.3%, Caisse d’Epargne is well capitalised to take on its rivals at home or, when it is ready, expand operations abroad. And Mr Milhaud says that if the bank finds it necessary to expand its capital base further, it might seek a share listing, though this issue would not be taken up before 2007.

Paralysis in Germany

In any event, Caisse d’Epargne’s remarkable transformation contrasts with the paralysis that plagues Germany’s banking sector. There the Sparkassen (state-owned savings banks) are staunchly resisting efforts to get them to merge with German private or co-operative banks for the sake of ending the enormous overcapacity in the industry.

Oversupply has held down profit margins, making banking in Germany an increasingly unattractive endeavour. Private banks, such as Deutsche, Dresdner, Commerzbank and HypoVereinsbank have suffered most because they have the smallest shares of the retail and corporate finance markets. Not surprisingly, they are the fiercest supporters of consolidation, which requires the privatisation of the Sparkassen.

The federal government in Berlin has also come out in favour of consolidation after seeing how it has strengthened banks not only in France, but also in Italy – where the privatisation of savings banks in 1998 spawned UniCredito, now one of Europe’s biggest and most profitable banks. Last spring, Chancellor Schröder urged all banks – private, state-owned and co-operative – to join forces to create “national champions” and thereby boost the international competitiveness of German banking.

Sparkassen stronghold

Yet among the Sparkassen, the chancellor’s appeal has fallen on deaf ears, for political reasons. Unlike in France, Berlin does not control the state banks. Instead, the retail-oriented Sparkassen and their wholesale-oriented brethren Landesbanken are firmly in the hands of state and local governments. Because the Sparkassen continue to make modest profits owing to their dominance of the German retail and corporate finance markets, these shareholders regard them as precious gems and are unwilling to part with them. That Sparkassen and Landesbanken play a crucial role in financing of local infrastructure only increases their value to these governments.

Publicly, however, the Sparkassen association DSGV never tires of arguing that its 500-odd members may not be privatised, as such a move would lead to the “financial exclusion” of both consumers and of small to medium-sized businesses (known in Germany as the Mittelstand).

What the DSGV means by “financial exclusion” is that if the Sparkassen were privatised, big private banks would “cherry pick” – that is, buy Sparkassen in more heavily populated, and hence more profitable, markets such as cities. Without the financial backing of acquired Sparkassen, the ones in less populated areas could quickly become extinct, with grave economic consequences for those areas, it argues.

“What we are saying is that our decentralised structure and our regional focus have ensured our economic success and should therefore not be changed. A privatisation of the Sparkassen might lead to a credit crunch in Germany, for the private banks would not want to serve the same markets as we do,” says Holger Berndt, an executive member of DSGV’s board, speaking to The Banker.

Nonsense, retorts Dechert’s Mr Althaus, who points out that there have been no indications of a credit crunch following privatisations of state banks elsewhere in Europe. “On the contrary, the emergence of giants like UniCredito in Italy or CNCE and Crédit Agricole in France probably means that their home markets are even better served, owing to their increased financial might,” he says.

Mr Milhaud says that he wonders why the German Sparkassen are not considering privatisation when conditions will become more difficult for them after they lose their state guarantees in July 2005. From that date, government shareholders of Sparkassen and Landesbanken may no longer bail out the banks, which means that they will lose their triple A debt ratings.

“My opinion, and I could be wrong, is that the Sparkassen’s model is not sustainable,” says Mr Milhaud. “One day, they will face the difficult questions of how they can refinance themselves at competitive rates and how they can easily obtain capital. As a private bank, we don’t have these worries, so I think our model could inspire them.”

Precautionary action

But Mr Berndt says that while he was “delighted” about Caisse d’Epargne’s transformation into a banking giant, it has no relevance for the Sparkassen. He says the savings banks are under no pressure to privatise because they have taken the necessary precautions ahead of the loss of guarantees, he says.

These precautions include improved risk monitoring and a so-called “risk-alliance system”, whereby the banks pledge to bail each other out if necessary. Both measures are aimed at maintaining the Sparkassen’ debt rating at investment grade level. To deal with liquidity problems, the banks have created a E3bn fund, which can be increased according to need.

Mr Berndt says the Sparkassen have no size aspirations because, with more than a E1000bn in assets and E10.5bn in pre-tax profit, they are already Germany’s largest banking group. “Unlike the French savings banks, we don’t require an international presence. Two of the Landesbanken, WestLB and BayernLB, are already active abroad,” he says.

Unless the Sparkassen get into serious trouble after the removal of guarantees next year, it seems that the shape of German banking will not change much. This is good for the Sparkassen. However, it could be detrimental for the German banking sector as a whole, especially if European countries continue to breed and develop champions with which even the best German banks cannot compete.


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