Two’s a trickle, three’s a trend. And by that logic, following Santander’s acquisition of Abbey last year, UniCredit’s embrace of HVB this spring and ABN Amro’s recent capture of Antonveneta, it might take just one more cross-border M&A deal to set off a torrent in European banking.
The mood of expectation, the sense of an industry on the verge of being plunged into a new phase of development by perhaps a single ambitious deal, is growing every day.
Executives at the large banks now talk openly about plans for bolt-on acquisitions in specific business lines – wealth management, consumer finance – and in emerging markets such as central and eastern Europe, China and India.
They are less outspoken about another preoccupation: the fear that, if other large banks in Europe start to partner off, even those running successful market-leading banks today could find themselves being subsumed tomorrow. But behind the scenes, the regular informal dinners between rival bank CEOs and chairmen are now proceeding with a new urgency and a new intensity in the preparatory analysis of potential combinations.
The strategic logic supporting cross-border deals in a single European market has been obvious for half a decade, since most countries reached the point of the top three or four banks controlling 70% to 80% of national banking systems. Banking products are not exactly at the cutting edge of new technology. A savings account, or a mortgage, can logically be supplied by an efficient Spanish bank in the Netherlands or an Italian bank in Germany. But shareholders wouldn’t support deals with no traditional cost-saving synergies, national vested interests held interlopers at bay and the supposed threat of acquisition by big US banks receded as they became bogged down in their own corporate governance and operational difficulties. For what felt like an age, nothing happened.
Now, that’s changing.
First, shareholders are aggressively pressing new demands. Having been obsessed with value and efficiency for three years or more, suddenly investors want growth. Bank CEOs’ eagerness to oblige is evident in the high prices they are willing to pay for acquisitions in emerging markets. Some 15 or so European banks are in the hunt for two opportunities in Romania. Watch the multiple of book value that Banca Comerciala Romana eventually goes for: three times or above would be remarkable for an institution the government could hardly give away three years ago.
Second, the nationalistic forces that have kept large banks safe from acquisition by foreigners are weakening. Witness the failure of Antonio Fazio, governor of the central bank of Italy, to engineer a domestic acquisition of the country’s eighth-largest bank, Antonveneta. Partly, that failure stemmed from the unwillingness of the country’s big three banks to step in. None seemed to want the pain of shedding jobs in a slow Italian economy. The country’s – arguably the continent’s – brightest banker, Alessandro Profumo, had a far more ambitious plan.
Third, banks are finding new financial rationales for cross-border deals. Santander can’t close down branches in the UK overlapping with Abbey’s, but it reckons that it can save costs by putting Abbey onto its state-of-the-art technology platform. UniCredit hopes to extend its management best practice to HVB’s growth businesses in central and eastern Europe and to the potential turnaround story in Germany.
There comes a time when national banks that have previously lobbied their regulators and governments for protection have more to gain from lobbying for open access across borders and so will accept foreign ownership of domestic competitors.
It’s impossible to predict the pattern of European bank M&A from here. Each new deal will have different consequences for remaining banks. If Fortis successfully finds a partner – it was recently rebuffed by Dexia – that will have more impact on ABN Amro and even Société Générale than it will on Lloyds TSB or HBOS.
The results from Santander’s purchase of Abbey should be clear from the second half of 2006. If that deal looks like a success, it will trigger more. Even if it disappoints, more banks will probably have taken the plunge by then.