Conventional wisdom consigns banks in the middle ground to oblivion. To prosper, the argument goes, smaller banks must either accept eventual merger or acquisition, or find niches in which they can demonstrate that their size is an advantage rather than a handicap.
To see whether the consensus holds true, Euromoney journalists interviewed the senior executives of a representative sample of Europe's banking Mittelstand to get first-hand these institutions' blueprint for survival. Will any of these banks be here in three years?
BW-Bank
A traditional institution that believes its market is impregnable is unlikely to prosper. UK institutions talked like BW after Big Bang. Just a handful remain
We mention the euro. "I just don't want to hear that word any more," grumbles Frank Heintzeler, chairman of the board of management at Baden-Württembergische Bank. "For us last year wasn't about the euro, it was about efforts to increase fee income and keeping abreast of the market during the autumn decline. It's been about our customers selling securities before the year-end for tax reasons. As for the euro, it was sewn up by mid-1998 as far as the board was concerned."
For this Stuttgart-based regional bank, which is 26% owned by the state but likes to think of itself as in the private sector, the real highlight of 1999 is the promise of two or three "golden years" as local rival Landesbank Baden-Württemberg - the merged product of three state-owned banks - slowly gets onto its feet, says Heintzeler.
This year, BW-Bank will also be concentrating on improving its credit risk management system, developing its retail strategy and acquiring new customers.
BW-Bank was banging the drum for the euro pretty early on. Heintzeler admits that it was "scared stiff" of being caught unprepared. The euro team was 60 to 70 people strong - 3% of the bank's workforce - engaged full-time for much of last year. "Out of 26 weekends our IT staff worked 19," project leader Michael Molliné says. And what about him? "Well, I did a few more than that." Nevertheless this bank doesn't expect much additional business following the single currency's launch.
Since BW-Bank is a regional bank - Heintzeler says most clients use a local cooperative or savings bank as their principal banker, plus BW for specialist products - it has no ambition to move beyond its traditional client base of medium-size companies in Baden-Württemberg, south-west Germany. The corporate-finance team is expanding to help these clients engage in mergers and acquisitions and equity financing.
For multinationals, BW-Bank offers a few products such as securities and forex trading, but it refuses on principle to lend because margins are so slender. Currency-trading revenues declined by 30% with the launch of the euro, but because the bank saw the problem coming, it compensated by beginning new trading activity in Swiss francs and yen. That made good the loss, says Heintzeler.
The single currency has in fact changed nothing about the bank's basic approach to the European market, which is based on commercial-banking cooperations and foreign desks located with its European partners: the Royal Bank of Scotland, Banco Urquijo of Spain, Banca Populare di Verona and others.
These cooperations may make commercial banking efficient but they still seem to miss out on obvious opportunities. Take equity research. BW's equity-research team has been increased from five to 20 to make possible pan-European sectoral analysis. But although they confer with counterparts at partner banks, the analysts still double up the workload by producing their own research across the board rather than buying in contributions from French, Spanish and British partners.
In the longer term, BW's management sees opportunities to discover new clients for specific products. Cash management, for instance, is not yet a European business, Molliné points out. Even multinationals like Hoechst, which do their own Target payments without a bank as intermediary, still have no Europe-wide cash-management systems. "In five years' time the standards will start to become established," Molliné says. "It won't be Swift; I personally believe that banks will set an industry standard on the basis of internet technology. For the time we are in a two-year vacuum waiting to see which medium it will be."
Heintzeler, a former head of corporate finance at Deutsche Bank, likes to describe the local Baden-Württemberg market as impregnable. "This is a very relationship-oriented market and is very difficult for outsiders to get to grips with. Companies are secretive, and new banks in the market will find it almost impossible to find out anything except their turnover figures. But we know their whole histories, their hobbies, their families and their lovers."
The flipside of that argument is that Baden-Württemberg is not attracting many newcomers because it is already overbanked. Margins have slimmed down even further over the past two years as L-Bank, Landesgirokasse and SüdwestLB have garnered market share in preparation for their merger to form Landesbank Baden-Württemberg.
Despite its claim to be a product-focused specialist, BW-Bank is still a classic interest-margin earner - just 20% of earnings come from commissions. The long-term aim is to increase that to 40%. Laura Covill
Banco Popular Español
Spanish banking is already so competitive and open to foreigners that smaller banks say they have little to fear from the introduction of the euro
Spain's Banco Popular is one of the few banks in Europe that seem to have got nearly everything right so far and are not scrambling to invent new strategies as a response to competition. Directors at this medium-size bank for retail and small-corporate business seem to have enjoyed rebuffing the takeover speculation that inevitably surfaced after the surprise merger of Banco Santander and Banco Central Hispano in January.
Theoretically, Popular looks like the perfect candidate for a takeover bid, except for the fact that major shareholders, including Allianz, own 31% and seem content for the bank to continue on the same lines.
Nor is there any apparent concern about new competitors from abroad, either in the retail or corporate markets. "The Spanish market is already highly competitive, so there would be no substantial consequences if more players arrived," says José Ramón Rodríguez, a member of the board of directors.