"Five years from now, financial services will be virtually unrecognizable. The industry, like airlines and aerospace before it, will be dominated by a handful of national and global giants that will dwarf even the biggest players we know today." Although that's how consultants McKinsey predict developments in banking and insurance, it only echoes what every bank CEO is saying, in public or private. And they have very little time in which to answer the questions this trend raises: What is our role? Do we have the management talent to be a buyer? Should we give up and sell to the highest bidder?
At the mega-bank end of the scale managements are embracing gigantism wholeheartedly and the process seems to be gathering pace. In April alone Citicorp's announcement that it is to merge with Sandy Weill's Travelers Group stood out - but only just - from BankAmerica's decision to join forces with NationsBank, BancOne's marriage to First Chicago, Royal Bank of Canada's tie-up with Bank of Montreal and the combination of CIBC with TD Bank. Things are hotting up in Europe's less flexible markets too. Formal approval has just been given for the merger of Istituto San Paolo di Torino and IMI and Credito Italiano is to merge with Unicredito.
The numbers are staggering. Last year, consolidations of banks in Europe alone totalled around $150 billion and over the last three years bank consolidations in the US totalled one trillion dollars - one fifth of the country's banking assets.
The cycle will accelerate. Banks are being forced to consolidate by the consolidation process itself. Only these mergers create entities that can support the huge technology and promotional spending required to compete regionally or globally. These institutions invade smaller banks' markets, forcing them together - as in Canada. Cross-selling financial products such as that envisaged in the Citicorp transaction is seen as a way to wring additional value from existing networks and product factories. And, most telling of all, in US studies of shareholder value creation, banks doing deals of at least 50% of their own asset size beat smaller acquirers by almost 30% and the S&P bank composite by 15%. Consolidation on this scale raises revenues, cuts costs relative to revenues and creates sustainable productivity gains.
But there will be problems. Other industries that have experienced consolidation of this magnitude have also seen sharp price falls. Pricing has already fallen dramatically across both retail and wholesale banking, and will fall further. This makes it more important for cost savings from mergers to come through quickly. NationsBank is worried that savings from its recent acquisition of Barnett Banks are too slow in arriving. It also gives institutions caught in the middle-ground little chance of survival.
In the short term, the need to consolidate may also start to outpace management's ability to cope with it. These mergers are nests of half-completed acquisitions, some just months old and the management problem is compounded by technology troubles. Add a multiple merger to the millennium bug, throw in the redenomination of a good-size chunk of the world's capital markets into euros and a manageable IT problem may become a billion-dollar disaster.