Prospective bank merger may signal ‘climate change’

By Anna McLauchlin

Date: 09/09/04

BANCO Santander Central Hispano is expected to get approval from the European Commission on 17 September for its €12.5 billion bid for the UK mortgage lender Abbey. But will this be the first in a wave of cross-border consolidations in the banking sector?

Société Générale suggested in a research note this week that Credit Suisse was most likely to figure in a cross-border deal. It named RBS, UBS, Barclays, Lloyds and BBVA as other possible players and cited Commerzbank, HVB, Dexia, KBC, Standard Chartered and Allied Irish Bank as possible targets.

Whether the Santander-Abbey tie-up becomes a done deal or is broken up by a more attractive counterbid, analysts do not expect the Commission to raise competition issues with the merger.

On Sunday (5 September) Mario Monti, the competition commissioner, seemed to hint that Brussels would clear the deal, saying that it fitted the Commission's objective of having a more integrated financial services market.

Santander's bid, which would supplant HSBC's 2000 buy-out of Credit Commercial de France as the largest cross-border deal, has prompted speculation about more mergers. A few weeks ago the CEO of the Royal Bank of Scotland, Sir Fred Goodwin, said that a "climate change" in the last six months had occurred. "Certainly there is a feeling that people are talking but I think there will be more speculation than real action," said one banking analyst in London speaking on condition of anonymity.

Part of the reason, he says, is that Abbey is a special case. Big enough to be of interest in the UK but small enough to acquire, it has huge room for improvement after being run down by bad management decisions. And perhaps most significantly, "it had its hands up to be bought".

Others point to language and cultural barriers to European consolidation. BNP Paribas CEO Baudouin Prot recently said failure to harmonize EU banking regulations means "cross-border operations in the EU remain difficult to organize or justify".

A recent Deutsche Bank study pointed out that cross-border acquisitions by European banks have actually diminished in value by €18.5 billion over five years. But one of the biggest obstacles to consolidation is still political resistance.

The Dutch presidency is to raise the issue of consolidating the banking sector with finance ministers on Saturday (11 September) at their informal council. The heads of three commercial banks have been invited to join a discussion of the obstacles to international mergers and takeovers.

"The UK market is far more open to overseas ambitions than others, such as the French, Germans or the Italians," said Sarah Horder of Exane BNP Paribas.

"The Italian market is very attractive because it is fairly inefficient so there are huge cost savings to be made. But the Italian central bank has made it very clear that it doesn't want any foreign interest until there has been sufficient consolidation in its domestic market."

Resistance to mergers might shift, analysts believe, if banks start to feel the threat of being swallowed up by bigger banks across the Atlantic. Talk on the trading floor has linked Citigroup with Barclays and the Bank of America with some German banks.

"The main motive for cross-border deals is not the cost of synergies but the fear of the size of US banks," said one London analyst. "Some might prefer to have a large EU champion than be owned by a US giant. If the Santander deal goes through, certainly BBVA [Banco Bilbao Vizcaya Argentaria] would take notice and then other banks would follow." said another.

"And then it wouldn't be long before banks start knocking on the Italian central bank's door."

Article discusses the likelihood of an increase in cross-border mergers in the European banking sector.

European Commission: DG Competition http://ec.europa.eu/competition/index_en.html

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