Merger frenzy slows as ‘bricks and mortar’ banks tackle threat from Internet upstarts

Date: 13/07/2000

By Bruce Barnard

EUROPEAN banking has recovered its poise after two years of frantic merger and acquisition activity capped by the dramatic collapse in May of the blockbuster alliance between Germany's Deutsche Bank and Dresdner Bank.

The industry is still consolidating, especially in highly fragmented markets such as Germany, but at a more measured pace, led by friendly take-overs such as HSBC's €11.8-billion acquisition of Credit Commercial de France and largely defensive cross-border alliances and share swops. A genuine pan-European bank is still a long way off.

Consolidation has slowed partly because of the difficulty in pulling off mergers, not just across borders but also within domestic markets.

The planned merger of Dresdner Bank and Commerzbank, Germany's third and fourth largest banks, has stirred unrest among staff and customers, and risks being torpedoed by powerful institutional shareholders. And even if they join forces, they would still only have 7% of Germany's retail banking market.

Acquisitions in the US are more popular than deals within Europe, despite the euro's weakness against the dollar and high US prices, with Dutch, Italian and French banks closing deals across the Atlantic in the past few weeks.

But there is another reason for the banks' waning interest in consolidation: the Internet.

They are too busy crafting strategies to meet the threat posed by upstart low-cost Internet financial services companies to spend time plotting mergers and take-overs. Rather than team up with rivals, banks are chasing alliances with telecoms companies and software houses to offer their customers Internet-based services ranging from online mortgages to television banking.

The vast majority of customers still use conventional services and regularly visit bank branches. The customer surfing the web for the best interest rates and most competitive loans is in a small minority.

But Internet banking is becoming the norm in Scandinavia, thanks to the region's global leadership in the use of personal computers and mobile phones. Sweden's largest bank Skandinaviska Enskilda Banken is closing 50 branches, or a fifth of its domestic network, this month because its customers are emigrating to the net.

Once they have their Internet strategies in place, top European banks will probably return to the mergers and acquisitions trail to buttress their challenge to the top US banks, especially in the fast-growing and highly profitable investment banking sector.

European hopes of breaking the Wall Street firms' stranglehold have been raised by clear evidence that Deutsche Bank's much-criticised €10.5-billion acquisition of US investment bank Bankers Trust in 1998 is finally paying off.

It has generated more revenue from investment banking than both Goldman Sachs and Merrill Lynch in each of the past two quarters, and overtook its two Swiss rivals - Credit Suisse First Boston and UBS Warburg - to become Europe's most profitable investment bank in 1999 with operating profits of €2.68 billion.

Investment banking is set for a bonanza in Europe as continental countries move to abandon their pay-as-you-go pension schemes in favour of the British model of long-term asset portfolios.

US investment bank Morgan Stanley Dean Witter calculates that even a partial changeover in countries such as Germany and France, which fund around 50% of their pensions, would release more than €200 billion a year in equity flows.

Before they start planning for the emergence of a European equity culture, the banks must confront a few 'local' difficulties.

The European Commission's campaign against illegal government aid to Germany's state-backed Landesbanks has been sucked into a legal quagmire and has sparked wild claims that the EU is out to destroy the country's social-market economy.

Relations with the Commission reached a new low after it accused 120 banks and banking federations of operating a cartel setting fees for changing euro-zone currencies.

But the biggest problem confronting the industry is the absence of a single banking regulator. Supervision remains a national affair despite the fact that 11 countries share a single currency, a single monetary policy and a single financial market.

The system is not uniform: Germany has a separate supervisory institution, while Spain relies on its central bank.

Standards also vary, with Germany reckoned to have the toughest rules. The rise in Internet banking has highlighted these national differences, while the new rules for e-commerce are subjecting 'bricks and mortar' banks to different regulations from their online rivals.

Alexandre Lamfalussy, the former head of the European Monetary Institute who has been tipped as a possible chairman of a group of 'wise men' being set up to consider how to manage a single financial services market, is aware of the dangers. "There is a genuine risk that the supervision and regulation of financial services in Europe will be unable to cope with the radical changes in the continent's financial landscape," he has warned.

But it may require a banking crisis in a national market to force the politicians to act.

European banking has recovered its poise after two years of frantic merger and acquisition activity capped by the dramatic collapse in May 2000 of the blockbuster alliance between Germany's Deutsche Bank and Dresdner Bank. Article forms part of a survey on financial services.