Banks kept guessing over post-EMU merger review

Date: 09/05/1996

By Chris Johnstone

EUROPE is seen as overdue for a wave of big bank mergers as financial institutions, in small countries in particular, prepare for the competitive effects of a single currency.

One perverse effect of the Euro is that it is likely to encourage a fresh wave of domestic mergers as banks move to strengthen their local positions in a more international market-place.

But the Commission's merger task force is keeping the sector guessing as to just how permissive it will be with such deals and how much the single currency effect will be built into its analysis of future bank take-overs and mergers.

This sensitive question is far from academic. The task force could be expected to take a more relaxed view of possible problem deals if it saw a single currency heralding more cross-border competition in what remains, for retail banking at least, a market dominated by national players.

Task force bosses, who pride themselves on taking a forward-looking and dynamic view of markets, say a study of the single currency effect on banks would be useful, but is not planned. They appear to be waiting for the right case to come along before coming off the fence and spelling out whether the single currency will alter their views.

“We have not really looked at this question because the type of cases we have dealt with so far have been fairly simple,” said one top official.

In its five-year history, the merger regulation machine has not really troubled the banking sector. Clearances have been handed out to a series of cross-border deals in which big national banks have mostly taken over specialised investment houses or institutions.

Big cross-border deals by retail banks are rare - and likely to stay that way, according to the Association of British Banks. It says the cultural and management problems posed by such deals are too great and they do not offer the cost-cutting opportunities that most banks are now looking for.

Domestic deals where one bank has swallowed another, such as TSB-Lloyds Bank or the current take-over by Crédit Agricole of Indosuez, have so far mainly been dealt with at national level because more than two-thirds of the bank assets involved are in one country.

Under the merger regulation, deals fall outside the scope of the Commission if more than

two-thirds of the Community turnover of all of the companies involved is in one member state.

Now, however, that picture could be changing. Banks, especially in smaller over-banked European countries such as Belgium, the Netherlands and Switzerland, have been boosting their non-domestic earnings to levels which might now just begin to bring deals between them within the scope of the task force.

“Normal business activities are still mostly on home territory, but in small countries such as Belgium, the Netherlands, Denmark and some of the Nordic countries, the trend seems to be changing,” said an official.

At the same time, banks in these very same small countries apparently feel the time is right now for national mergers and take-overs to create big bank players who will have a role in the single currency world of tomorrow.

The tentative talks revealed this month and the subsequent breakdown of negotiations between Union Bank of Switzerland and CS Holding, parent company of Crédit Suisse, which would have created Europe's largest bank, is one sign of the times. Switzerland is heavily over-banked, in spite of a slow shake-out over the past ten years, and a merger would have speeded what analysts say is an overdue restructuring.

The Swiss deal would have prompted Commission scrutiny and Brussels is still half expecting to be involved. “I think it may not be the last we have heard from the Swiss,” said one competition official.

Belgium is another country where frantic rumours and denials have been flying around for months about a possible merger or take-over involving two of its biggest banks, Banque Bruxelles Lambert and Generale Bank.

Belgian Finance Minister Philippe Maystadt has backed the idea of a big Belgian bank competing at a European level and so has Etienne Davignon, the influential chairman of Belgium's flagship holding company Société Générale.

Any deal involving Generale Bank would probably interest the Commission's merger task force. Generale Bank generated 40&percent; of its profits outside Belgium in 1995 and that figure is set to rise to 50&percent; this year when it consolidates results from Generale Bank Nederland, the country's fourth biggest bank, and French fund manager Fimagest.

Belgium's Kredietbank, which has distanced itself from the current round of merger and take-over talks, says about a third of its profits and turnover are now outside its home base. It claims other big Belgian banks have a similar profile.

“We are looking to diversify outside Belgium. That is a high priority for Kredietbank and other local banks. It is a hypothetical question if the Commission would be involved in a big Belgian bank merger,” said a spokeswoman.

The Commission is keen to keep everyone guessing - nothing, it seems, should be banked on.