European Banks Look for Dancing Partners: The Consolidation of the Sector Begins

The consolidation of the European banking sector, announced years ago, is now expanding in scope and the forecasts are beginning to become reality. The movement began in Holland but it promises to extend into many other corners of Europe as well. Everything started when Barclays launched a 64 billion euro ($88 billion) takeover offer for ABN Amro, which began exclusive negotiations that culminated in a merger agreement. Nevertheless, a consortium of banks formed by Santander, Royal Bank of Scotland (RBS) and Fortis appeared on the scene with the intention of taking over ABN Amro by offering 71.1 billion euros. They recently improved their offer by promising to pay 93% of that sum in cash, compared with 79.1% in their previous offer.


The question now is if Barclays will counterattack and make a new offer.
Analysts believe that it should give up its acquisition plans because it will not be able to improve on its rivals’ offer and will not be able to muster broad enough support from shareholders to improve its offer. Frits Seegers, director of consumer banking services at Barclays, said in a press conference in Amsterdam that his offer must prevail because it is “a question of growth.”

Mauro Guillén, professor of international management at Wharton, said that this move is “fundamental” for the sector. “It will determine whether Barclays continues to be the leader. In addition, if Fortis, RBS and Santander triumph, they could get stronger and wind up dictating the rules of the game to the rest” of the sector, he added.

The consolidation of the European financial market is “a reality,” according to Manuel Romera, director of the finance division of the Instituto de Empresa business school. Romera believes that this sort of process “is always difficult because banks have different business philosophies. Some institutions play the role of buyers and others are bought out; that has much to do with the business results that these moves lead to.” Romera explained that “cartels” are not always a question of size but of “management ideologies, some of which are more aggressive than others.”

Candidates for Mergers and Acquisitions

 

“British, French and Spanish banks will be the ones that make acquisitions although some of them could also be the target of an acquisition offer,” says Guillén. “Banks from Germany, Italy and other countries are more likely to be the targets.”


Spain’s BBVA is one of the banks likely to be a key player in a business deal. Headed by Francisco González, BBVA has made several moves since last winter, when it looked like a possible takeover target. First, BBVA expanded its capital by three billion euros last November in order to improve its solvency ratios. However, analysts interpreted this as a measure designed to prepare itself for making an acquisition. That occurred a few months later in February, when BBVA announced the acquisition of Compass, an American institution, for a price of $9.6 billion. BBVA also announced that it had increased its capital by $3.54 billion euros in order to close the deal.

 

Despite such efforts to expand, BBVA has not been able to remove itself from the group of companies that are viewed as takeover targets. In fact, BBVA has been courted by more than one company. There is talk about possible interest on the part of Citigroup, the American giant, as well by Britain’s HSBC, the fourth-largest bank in the world measured by market capitalization. With a market cap of about 64 billion euros, BBVA, based in Bilbao, would be a plausible target for some banks that are worth as much as 180 billion euros, as in the case of Citigroup, and 160 billion euros as in the case of HSBC.

 

According to Romera, “BBVA has a big problem, which is that the board of directors only controls a bit more than 2% of the total shares. Another factor may be the lack of a major shareholder, since anyone who acquires 10% of the shares could control it.” A point in its favor is that “this institution has a president whose managerial approach is very aggressive and oriented toward making acquisitions. And, it has very good management.”

BBVA wins international praise for the strength of its business ratios. For example, when it comes to efficiency (the ratio that measures how much a company spends out of every 100 euros it takes in), BBVA has a ratio of 39.5% while Santander has a ratio of 46.32%. European competitors don’t do nearly as well. For example, ABN Amro spends 66.6 euros for every 100 euros it takes in, while Deutsche Bank has an efficiency rate of 65.9%. The average European bank has an efficiency ratio above 50%.

“BBVA is a good bank of intermediate size and it is profitable. As a result, it is attractive. But that doesn’t mean that it is going to be acquired. It has its own strategy for growth,” said Guillén. This much is clear: The bank feels comfortable about playing the leading role when it comes to making corporate deals. Manuel González-Adalid, its director of finance, emphasized recently that the number of mergers and acquisitions in the sector will tend to increase, not only among domestic banks, but also in new markets. He added that his institution is prepared to take advantage of the opportunities offered by this new environment, and that it has plans to grow in all of its business sectors.

 

The View from France

 

The wave of bank consolidations could also reach France, a market where there are three large banks: BNP Paribas, the country’s biggest institution and the second-largest in the euro zone with a market capitalization of 81.309 billion euros; Société Generale (SG) that is worth 64.714 billion euros, and Credit Agricole with a market capitalization of 48.373,99 billion euros, which rank second and third.


According to a recent report in Les Echos, the French newspaper, SG has hired two American investment banks to study possible options for acquiring BNP Paribas, including the possibility of launching a hostile offer for it. This is less likely to succeed, however, because of the great differences in the market value of the two banks.

A short while ago, SG said that a major move was “neither necessary nor urgent.” However, it may pursue a merger because of the growing danger that it will become the object of a takeover offer from another European institution now that ABN Amro will likely be taken over by Barclays or by a consortium made up of RBS, Santander and Fortis. Such a merger of SG and BNP Paribas would fit in with France’s desire to have a major national player in a full range of business activities, and it would create a global banking giant. The resulting institution would have a market capitalization of 146 billion euros. It would be the largest bank in the euro zone, the fifth-largest in the world, and the second-largest bank in Europe, after only HSBC.

Some rumors in the market say that SG could wind up in Spain, where BBVA could be preparing an offer for it involving an exchange of shares.

 

Consolidation in Italy

In Italy, moves have already begun for dealing with trans-border consolidation. UniCredit approached Capitalia, and it has completed a merger that will create the largest bank in the euro zone and the seventh-largest in the world measured by its market capitalization of about 100 billion euros. This bank will be the second-largest banking institutions in all of Europe, behind only HSBC, and followed closely by UBS, with its capitalization of 99 billion euros.

The new UniCredit will also be the largest Italian bank in terms of capitalization. However, its market share of 15.8% will not surpass that of its direct competitor, Intesa-Sanpaolo, which has 20%. Nevertheless, the power of the new institution can be appreciated when you look at its role in the main nerve centers of the Italian economy. It owns 5.5% of Generali, an insurance company; 2.1% of RCS (the media company that owns Recoletos, the Spanish media company; Spain’s El Mundo newspaper; and Italy’s Corriere Della Sera newspaper); 1.9% of the Gemina construction company; 5% of automaker Fiat, and 6.7% of the Benetton family’s Schemaventotto group.

The deal has yet to receive approval by Italian regulators at the Bank of Italy, by the country’s anti-trust agency and by ISVAP, the institution that monitors the private insurance industry. The two parties to the deal forecast that the merger could be closed “at the beginning of the last quarter” of this year. Then, the plan will have to be approved again next summer by assemblies of the two banks.

Strategies and Challenges

Is it really necessary for Europe’s banking sector to consolidate? Guillén says that “when they operate in the same monetary zone, it does not make much sense for banks to be established fundamentally in one country.” As a result, he believes that “in a single market, you should have transnational banks.”

According to Romera, it is debatable that mergers “have value” in themselves for the institutions involved. “Consolidation is a concept that is somewhat demagogic because it sometimes doesn’t create a bank that is better or a bank that has a higher efficiency ratio. It does seem clear that such a merger often helps to increase the power and the ego of its managers.” Romera notes that the economy in general, and companies in particular, have gone through “a major period of expansion that can come to an end at any moment and lead to a decline.” A merger can be “an excuse” for managing the business in a different way and, for example, making changes in personnel.

Romera says that France provides a good example. If the still hypothetical merger between BNP Paribas and Société Générale takes place, the resulting group would carry out an enormous restructuring of its personnel. The merger would also have to restructure its business activities because both companies have a strong component of corporate and investment banking, deriving between 40% and 45% of their profits from those business sectors.

The map of European banking is starting to be re-drawn, and its future will be determined inevitably by the measures taken in the coming months and years. However, the challenges facing European institutions are a lot broader than that. “Efficiency, consolidation and growth” are the three words that Guillén mentions when he describes the goals that must be pursued by Santander, BNP Paribas, RBS and BBVA. As Romera notes: “The big challenge for all of them will be to keep profits growing at the same pace as they have grown until now, and to improve efficiency just as much.”

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