Is bigger better for European banks?

European bourses are alive with speculation about takeovers in the banking sector. In London institutions such as Barclays and Lloyds TSB, which are so important to the UK economy that elsewhere they would be regarded as impregnable 'national champions,' are being touted as potential takeover targets.

American behemoths Citigroup and JP Morgan Chase are said to be lumbering around the City of London looking to beef up their UK and EU presence. In Germany the long-running soap opera about who will tie up with Commerzbank is still titillating the voyeurs of the financial market.

But surprisingly, it is Italy that has recently seen the biggest cross-border banking deals. Within days of Antonio Fazio, the disgraced Bank of Italy governor, resigning in mid-December to be replaced by Mario Draghi, an ex-Goldman Sachs banker, the previously hermetically sealed Italian banking sector began to hiss and fizz.

Both Banca Antonveneta and Banca Nazionale del Lavoro, two Italian banks which Fazio had been trying to protect from foreign predators, quickly surrendered to marauders from north of the Alps. ABN-Amro finally sank its teeth into Banca Antonveneta. In February, the wily BNP Paribas sneaked in downwind of Banco Bilbao Vizcaya Argentaria (BBVA) of Spain, whose 15% stake in BNL had looked like a takeover launch-pad. Instead the French bank pounced on its Italian prey with a successful EUR 9 billion offer.

What explains this outbreak of merger and acquisition activity in banking?

In September 2004, the EU's foreign ministers were sitting in the late summer sun at the Dutch coastal resort of Scheveningen, worrying that there had been so little cross-border consolidation in the EU banking sector.

The fears expressed at that meeting and in the analytical report which the Commission published in October 2005, which tried to explain why EU banks were not consolidating, were that if Europe's biggest banks did not get bigger, it would impede the creation of a real EU single financial market. They would be outgunned in global markets, and some would find themselves threatened by unwelcome American takeovers.

In the case of Italy, which is short of big companies as well as big banks with global clout, the problem is even worse. One big incentive Italy's banks have to merge or be swallowed by other EU institutions, is that, by becoming bigger and more diversified, they will be stronger. To be blunt, they may then be better able to survive the long economic winter which many fear Italy will have to endure if it is to become competitive in world markets now that devaluation of the currency is no longer an easy option. As Credit Suisse pointed out, in an analysis of the BNP Paribas/BNL deal, even today one of the advantages of the deal for BNL is that it will immediately benefit from the greater credit worthiness of BNP Paribas and be able to raise funds more cheaply.

Credit Suisse argues, too, that one side-effect of these two deals in Italy will be to promote efficiency by encouraging more domestic bank mergers by institutions which fear that they will be targeted by foreigners if they do not get bigger.

In its paper on cross-border banking the Commission maintained that cross-border mergers were needed to improve the global competitiveness of Europe's banking system, increase competition, raise efficiency and lower costs.

Vasco Moreno of the London office of boutique financial sector investment bank Keefe, Bruyette & Woods, says that defensive mergers by banks getting together to avoid unwanted takeovers are already one of the main drivers of merger deals.

Another driver, particularly for banks which moved in to the new member states in advance of enlargement, was the perception that these were potential growth markets. Germany's HypoVereinsbank (HVB) and Italy's Unicredito moved into Eastern Europe, at first independently. Last year the two banks decided to join forces in a EUR 19bn deal which was Europe's biggest ever cross-border banking deal.

Moreno cautions, however, that "most transformational cross-border banking merger attempts end in failure due to economics, management conflicts, cultural gaps (a problem even with some domestic deals), shareholder cynicism about merger value added and more intense regulatory scrutiny". It is a reminder that plenty of obstacles to successful deals remain. Efficiency gains are harder to secure if workers cannot be fired. Efforts by the Commission to promote effective cross-border payments structures, cheaper clearing and settlement systems and greater regulatory convergence and clarity, highlight just a few of the areas where work is needed if a more integrated EU financial market is to emerge and the cost reductions associated with modern information technologies are to be realised.

Cross-border banking mergers

• June 2005 EUR 19.2bn Unicredito/HypoVereinsbank
• July 2004 EUR 12.6bn Santander/Abbey National
• April 2000 EUR 9.0bn HSBC/CCF
• August 2000 EUR 6.0bn HypoVereinsbank/Bank Austria
• March 2005 EUR 7.6bn ABN Amro/Banca Antonveneta
• May 2005 EUR 4.4bn Barclays/ABSA

Sources: Keefe, Bruyette & Woods, Credit Suisse

• Stewart Fleming is a freelance journalist based in Brussels.

Article takes a look at the issue of cross-border consolidation in the European banking sector.
Article is part of a European Voice Special Report, 'European Banking'.

• Primary Source

European Commission: DG Internal Market and Services: Free movement of services: Financial services: Banking http://ec.europa.eu/comm/internal_market/bank/index_en.htm

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