War breaks out in EU’s banking sector

Date: 07/10/1999

By Tim Jones

AS DAWN broke over London one Friday in late September, a couple of senior managers high up in the City of London's imposing NatWest Tower got the shock of their lives.

Electronic news agencies had just flashed reports that the Bank of Scotland, an institution half its size and not even based in the City, had just launched a €32-billion Olivetti-style bid for the iconic National Westminster Bank.

Until now, for all the fabled aggression of the Anglo-Saxon market-place, UK banking mergers have tended to be friendly affairs. Target banks have come to acknowledge the under-performance of their stock and their inability to break out of declining markets, and walked almost happily into the clutches of bigger partners with clout.

This time was different. BoS had approached the NatWest management two years earlier, but had been rebuffed. However, the chance of acquiring a bank with a huge domestic retail banking network and the possibility of selling its investment banking arms at an attractive price was too much for the Scots to resist, and they pounced.

The BoS/NatWest battle, which promises to trundle on for months, is just the latest in a spate of big-ticket banking mergers spreading across the continent. Not only are the number growing, but also the bitterness of the contests.

In February, French banks Société Générale and Paribas announced plans to merge and form a European powerhouse to take on the big players in the EU market. But their plans were soon scuppered after Banque Nationale de Paris launched a hostile bid for the other two. That marked the start of a six-month banking war the likes of which Paris had never seen.

This culminated in the worst of all worlds when Bank of France Governor Jean-Claude Trichet ruled that BNP could not accept the 37% of SG's shares involved in its bid while also taking effective control of Paribas.

The high-profile French battle followed a wave of domestic mergers in Spain, Benelux, the Nordic countries and the grand-daddy of them all, the €75-billion merger of Union Bank of Switzerland and Swiss Bank Corporation to form the continent's largest bank.

It is not over yet. Dutch banks and insurance companies ABN Amro, ING Group and Aegon are sniffing around for acquisitions in Germany, France and the UK, while Germany's Dresdner Bank is seeking to ape rival Deutsche Bank, which recently took over Bankers' Trust.

All these deals show how vulnerable once all-powerful European banks have become because of the combined impact of serious trading losses in emerging markets, the growth of cross-border and Internet banking, and the arrival of the euro.

International management consultants McKinsey estimate that Europe-wide revenues from corporate lending will halve to around €50 billion in the coming five years as price competition intensifies. They also warn that two-thirds of banks' foreign exchange business, which used to account for 5% of their earnings, will vanish in the wake of economic and monetary union.

In a recent study, the Basle-based Bank for International Settlements concluded that "the banking sector in continental Europe seems poised for a period of sharply increased competition", brought on by new technologies, "the evolving role of the state" and a new concern for maximising returns to shareholders.

Banks are having to specialise in businesses where they can compete right across Europe. Hypovereinsbank wants to become Europe's top mortgage lender, while Paribas may focus on investment banking. Some analysts believe that, ten years from now, Europe will host only a handful of banking/insurance goliaths such as Lloyds TSB, Deutsche/Dresdner/BNP, AXA-UAP or Allianz.

Their vulnerability derives from what was once their strength. Traditionally, European banks have immersed themselves in the whole range of banking activity from standard retail business to investment banking and, in the case of Germany in particular, large-scale stake-holdings in manufacturing industry. Deutsche and Dresdner alone have industrial holdings worth nearly €40 billion.

This meant that a few banks had strangleholds on their national markets. There were no alternatives to their interest rates, charges and management fees. But all that is now changing. Throughout Europe, but particularly in the UK and Germany, direct banking via telephone and Internet is stealing significant market share from banks lumbered with costly branch networks.

In the UK, small customers are heading in droves for supermarkets, which are using their wide geographical presence and marketing might to offer banking services, insurance and even pensions. Many people never use high street banks any more. Even Germany, which has been slow to embrace online banking and the equity market culture, is making up for lost time.

Deutsche, Dresdner and Commerz-bank are all feeling the pinch. Dresdner is said to have held talks with the other two and HypoVereins bank about deals short of full mergers in which domestic retail businesses could be combined.

Dresdner Chairman Bernhard Walter, who is sitting on a €10-billion war-chest, has made no secret of his plans to build up the bank's presence in France, Spain and Italy.

Traditional banks are having to hack away at their costs - the main reason for the proliferation of domestic mergers. When UBS and SBC announced their h75-billion merger in December 1997, traders' message screens in Zurich and the City of London were awash with gallows humour. UBS, it was said, stood for Unemployed Banking Staff and SBC for Sacked by Christmas.

Until recently, the trend in the UK was towards 'bancassurance' conglomerates following the announcement in June of the take-over of Scottish Widows by Lloyds TSB and the now-dead proposed merger of NatWest and Legal & General.

Now Bank of Scotland is offering a straightforward cost-cutting alternative route.

US investment bank JP Morgan has estimated that major banks could save close to €100 billion through mergers, staff cuts, merging computer systems and selling off low-return loans by turning them into securities.

The BoS/NatWest battle will certainly not be the last, particularly if the

European Commission's plan to create a true single market for financial services within five years bears fruit.

Even before legislative barriers to trade in financial products are brought down, the growth of electronic banking will probably do the Commission's job for it.

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