European banking. Abbey ending?

The meaning (or lack of it) of Europe's biggest cross-border bank merger

WHEN Abbey National, an ailing British high-street bank, rebranded itself last autumn, it took on a new name (out went the “National”), a new look (soothing pastels, fuzzy lettering) and a new lexicon (it promised its customers plain English and no jargon). Now, halfway through a three-year resuscitation programme, the bank, Britain's sixth-biggest, is to be sold. On July 26th, Abbey said that its board had approved an £8.5 billion ($15.5 billion) cash-and-shares bid from Banco Santander Central Hispano, Spain's biggest bank.

If accepted by shareholders, the deal will mark the biggest cross-border bank merger in Europe, eclipsing HSBC's purchase of Credit Commercial de France for €11 billion ($10.5 billion) in 2000, as well as the first acquisition of a British bank by one from continental Europe. Some pundits see it as the start of a long-predicted wave of takeovers across Europe's borders. Although the European Union is in theory a single market, its banking industry remains fractured along national lines.

For Santander, too, this is a momentous step. Since 1986, when its boss, Emilio Botn, took the helm, it has grown from being merely one of Spain's seven leading banks into its biggest and has become the largest foreign bank in Latin America through a number of often pricey acquisitions. Now it is buying its way into the top ten banks in the world by market capitalisation. Primarily a retail bank, Santander will gain 741 branches and almost 18m customers in Britain, and the number-two slot in the country's mortgage market. The deal will also reduce Santander's dependence on Spain and Latin America. Hitherto it has managed to buy only small consumer-finance firms in continental Europe.

The deal may yet come unstuck. Abbey's 1.75m small shareholders, most of whom have been with it since demutualisation in 1989, might not want shares in a Spanish bank and in any case might hope for a better offer. Two years ago, when its share price was higher, Abbey's then bosses spurned approaches from National Australia Bank and Bank of Ireland (chart 2). Recently Citigroup and Bank of America have been among those said to be interested. A British buyer looks unlikely, because an £18 billion bid by Lloyds TSB in 2001 was stymied by competition authorities. Even so, changes in the banking market since then - notably, the merger of Halifax and Bank of Scotland to form HBOS, now Britain's fourth-biggest bank - may have left the door ajar.

Given all this, some question why Luqman Arnold, who was brought in as chief executive in 2002 to revive Abbey, was so quick to accept Santander's offer just as his efforts seemed to be bearing fruit. The cause of Abbey's terrible recent troubles - a disastrous foray into corporate and wholesale banking - has been cut off. The bank made a profit in the first half of this year, having lost pounds 644m after tax in 2003. Pessimists note, however, that Abbey is still struggling. Its share of household savings fell to 7.1% last year, from 8.3% in 2000. It suffered an outflow of £1.2 billion in deposits in the first quarter of this year. Despite the rebranding, it still has its work cut out in its core, retail business.

Mr Arnold thinks that Santander can do a better job than he can of restoring Abbey's fortunes. So, of course, does Mr Botn. He plans to cut annual costs by €450m within three years, mostly by replacing Abbey's antiquated information-technology systems and boosting efficiency, and to raise revenue by €110m a year by simplifying some products and cross-selling others. Abbey has the lowest revenue per customer of Britain's top banks.

Goodbye to bad habits

Others are not so sure. Abbey has cut costs already, they point out. A merger with a British bank, if it were not ruled out, might offer much greater savings, for example by closing duplicated branches. Despite the high margins enjoyed by British banks, the market is competitive, especially in Abbey's patch, savings and mortgages. The mortgage market may get even tougher now that the Bank of England is issuing warnings about the overheated housing market and is raising interest rates. Analysts at Citigroup reckon that a more realistic figure for cost savings plus increased revenues from an Abbey-Santander marriage is about half of Mr Botn's estimate.

Nonetheless, investment bankers across Europe are wishing Mr Botn well, hoping that his bid will spark other cross-border deals. So far, most such mergers have been small, between neighbours and not always successful. One of the few truly cross-border banks, a Danish-Finnish-Norwegian-Swedish combination called Nordea, is widely considered a flop.

Although it is possible that European banks will be panicked by Santander's move into a sudden dash for size, this week's deal looks unlikely to start a rush. The barriers that have stood in the way of cross-border mergers in the past - different taxes, regulations, cultures and languages - remain. The patchwork of national rules governing financial services means that bank products tend to be specific to each country and thus cannot be easily sold across borders.

As a result, many of the usual reasons for merging, such as cutting overlapping branches or products, or taking existing products into new, similar markets, are absent. Then there is nationalism, which might prevent banks from selling out to foreigners. And in some countries, especially Germany, domestic consolidation still has some way to run. Britain and Spain, as it happens, are among Europe's most concentrated markets. “Maybe in five or ten years, there will be a pan-European bank market,” muses Sam Theodore of Moody's, a rating agency, “but for now, big cross-border bank deals add little value.” Such reservations, however, are not enough to stop Mr Botn.

The article analyses the meaning (or lack of it) of Europe's biggest cross-border bank merger.

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