Chill winds of change blow into banking

Date: 28/03/1996

By Tim Jones

IF European banks really are heading into a brave new world of high technology, home banking and a single currency area stretching from Brest to Berlin, someone had better remind them.

For in the real world, 19 years after the first banking directive allowed a credit institution in one member state to offer its services in another, the Union's financial services remain highly fragmented.

This is starting to worry some of the EU's politicians.

In Belgium, speculation has been rife for months that Générale de Banque/Generale Bank, Kredietbank, or BBL would link up either with each other, or with smaller savings banks, to form a 'mega-bank'.

Encouraging this idea, Communication Minister Elio Di Rupo spelled out the alternative. “With monetary union, competition will become stronger and Belgian banks will lose the protection and supremacy that the Belgian franc currently gives them on the national market.”

This phenomenon is mirrored across Europe. The biggest banks in the Union are essentially national or local in character, still making the bulk of their profits from the so-called 'retail' business with the savings and loans of individuals and small businesses.

So far, the wave of mergers predicted by Deutsche Bank chairman Hilmar Kopper has not materialised.

His forecast that “only the big boys will survive in the global market-place” has so far fallen on only partially-open ears.

The experience of the US in the first half of last year, when 330 banking mergers took place culminating in the giant 8-billion-ecu link-up between Chemical Banking Corporation and Chase Manhattan, is not about to be mirrored in Europe.

If the Euro does appear in 1999, then things may change - but not yet.

Most merger activity is still along the lines of last year's concentration between Lloyds Bank and TSB Group, ie within national borders.

When banks do step across borders, the arrangements are usually low-key. The most ambitious so far has been the agreement between Banque Nationale de Paris (BNP) and Dresdner Bank to take a mutual 10&percent; stakeholding in each other.

To most in the industry, the idea of a pan-European retail banking operation remains some way off. There are still too many legal, cultural and fiscal disincentives to establishing Deutsche Bank branches on the high streets of Caen or seeing Berliners opening current accounts with Den Danske Bank.

But this does not mean that nothing has changed.

Banks are falling over themselves in the rush to buy London's merchant banks.

Last year, Swiss Bank Corporation snapped up SG Warburg and ING picked up the remains of Barings, following Union Bank of Switzerland's take-over of Phillips and Drew and Deutsche Bank's switching of much of its investment banking to London in order to complement its Morgan Grenfell acquisition. The UK government has just introduced a law to make building societies open to take-overs by non-British companies.

The key reason why banks are reluctant to make huge investments abroad is that, so far, they cannot see any obvious advantages.

Across the sector, the compression of margins - the difference between the interest rate paid to depositors or for funds on the money market and the rate charged to borrowers - the bottom line of banking profits, is continuing even as memories of the early Nineties recession fade.

But in Spain and Italy, margins are still relatively fat and attractive to a player such as Deutsche Bank keen to bring some expertise to countries with less sophisticated banking systems.

Even though the scope for profits remains narrow, banks in most countries are certainly over the worst days of the early Nineties.

Provisions against bad and doubtful debts are falling - they were down 30&percent; for German banks alone in 1995 - and the recession has largely been weathered, except perhaps in France.

French banks are burdened by bad property loans which will take many years to shake off. In 1994, Suez had to make provisions of more than 10 billion ecu and Crédit Lyonnais was hit so hard that 21 billion ecu of effectively worthless assets had to be siphoned off into a vehicle company and the state-owned bank recapitalised.

This story seemed to be over with the government's bail-out plan envisaging a slow but sure return to profitability.

But less than one year after the agreement was struck, the bank is already appealing to the state for more aid under the stern gaze of the European Commission's competition watchdogs.

For banks like Lyonnais, the prospects are not as bad as they were three years ago, but neither are they rosy.

Economic growth will continue in 1996 but, as has become an almost daily refrain, a crisis of confidence has descended over Europe. Bankers are starting to worry that the elusive revival in consumer confidence will not translate into increased borrowing to spend while, at the same time, new construction has started to slow.

Even worse, consumers are becoming more picky. More customers are choosing optional services such as direct banking, enabling them to make transactions by telephone when they wish rather than being hamstrung by banks' inconvenient opening hours.

With competition becoming increasingly fierce and margins thin, banks are cutting costs wherever they can. The Frankfurt Grossbanken has announced unprecedented cuts in its western German retail networks and UK banks have been hacking away at staff numbers for years.

The financial services industry is poised to go through the same experience felt by the manufacturing industry 15 to 20 years ago. While cutbacks have been harshest in the UK, other countries led by Germany, the Netherlands, Denmark and Sweden are heading down the same road. Some estimate that the single currency could cost around 300,000 jobs.

What banks are looking for now is income generation and they are tapping into long-term savings patterns by diversifying into pension funds and insurance companies.

Yet banks are still banks. The survival of the branch attests to this. While soothsayers predict the emergence of plastic money and home banking by modem, these futuristic schemes are finding it hard to take off.

Mondex, a joint venture between the UK's National Westminster and Midland banks and British Telecom, began an electronic purse trial in the south-west English city of Swindon last year.

A card capable of electronically storing some of the cash from a holder's current account can be used in one of 700 retail outlets. Interesting, exciting, but so far playing in only one small city.

In fact, the high street bank branch - the thing that makes banks different - where people can go to deposit savings and withdraw cash, is thriving, albeit in new forms.

Spain's Banco Bilbao Vizcaya (BBV) already has a huge branch presence and recently announced another 200 openings, even though most of them will be small three-staff operations supplemented by direct banking services.

Similarly, the highly-successful Svenska Handelsbank loves branches. The trend seems to be to keep the branch as an institution, but run it as inexpensively as possible.

A pattern appears to be emerging. Banks are licking their wounds after the hard years of the early Nineties and consolidating core businesses.

While they may be reticent to pre-empt the arrival of a single currency through cross-border mergers, their interest in tapping into pensions and insurance funds speaks volumes about the new economic orthodoxy.

With populations ageing, governments are increasingly handing over the costs and potential profits of pensions and insurance against life's mishaps to the private sector. For banks, that is the future.