THIS SUMMER, THE head of the European financial institutions group at one of the pre-eminent global investment banks – a veteran adviser on many bank mergers and acquisitions – was having dinner with a group of fund managers. The topic of conversation was not one of his own deals but a smaller transaction – Barclays’ bid for a majority stake in Absa.
Did the fund managers really think, he asked, perhaps just a little mischievously, that it was a good idea for the UK bank to be investing £2.6 billion ($4.6 billion) in a single deal in South Africa?
Their enthusiasm for the deal took him aback. “They absolutely loved it,” he recalls. “And it brought home to me that if a bank management team has credibility, investors are now in the mood to back them to do deals they simply were not prepared to countenance a year or two ago.”
Investors want growth. Many European banks – now sitting on surplus capital, struggling to earn a return on it yet reluctant to hand it back to shareholders – are hard-pressed to present themselves as growth stories. They’ve done the restructurings, shed the non-core businesses and duff assets like industrial shareholdings, knocked out costs through domestic mergers, improved the efficiency of remaining operations and, at the end of it all, have turned themselves into boring utilities.
More of the same simply is not good enough. “You tend to run into very few people at the well-run financial institutions that are focused purely on pursuing non-growth strategies,” says Jorge Calderon, recently appointed head of the financial institutions group at Deutsche Bank. Good management teams are growing restless. Calderon adds: “There are many more banks in Europe than there are top-quality management teams to run them.”
The high cost of growth
Investors’ new appetite for growth explains bank managements’ recent eagerness to buy in emerging markets: eastern Europe, Turkey, South Africa, China, India.
Many large European banks were sniffing around the stake in Garanti, Turkey’s third-largest private bank, that the Dogus group sold in August. GE Consumer Finance trumped them with a spectacular $1.55 billion offer for the 25.5% holding. The bidding might be even fiercer for the 62% stake in Romania’s Banca Comerciala Romana which the Romanian government now has on the block. The winner might end up paying four times book value or more.
But there are few large emerging-market banks available. Standard Chartered may be on many banks’ wish-lists: it would command a hefty price. Smaller emerging-markets acquisitions simply aren’t enough to recast large European banks as growth stories.
For now, the bank management teams with kudos are those that have already built up in eastern Europe. One analyst says: “Société Générale was buying when striking miners were on the streets in Romania and the country was in chaos. That was the time to get in. Erste has done such a good job that the markets would back Andreas Treichl [CEO of Erste since 1997] to do almost anything he wanted. For big banks bidding now, unless they can raise the proportion of their earnings derived from growth markets to over 20%, they’re just buying some long-term options.”
Big banks need to do something else.
Suddenly, big cross-border M&A deals are back on the agenda in European banking. Davide Taliente, managing director and head of European banking at Mercer Oliver Wyman, says: “The question is no longer whether a new wave of consolidation will unfold, but rather when it gets rolling and what shape it will eventually take.”
Philippe Sacerdot, head of European banks at UBS, says: “Among the large banks in Europe those that have higher growth prospects now have something to offer those that have annuity earnings but have fewer options for growth, and banks which don't want to be acquired, which cannot see how to grow themselves without acquiring but cannot find targets without jeopardizing shareholder value, may reconsider the idea of mergers of equals which 12 months ago they would not have dared to mention.”
Size matters
Who will be the key players in the drama? ABN Amro is in many people’s sights. For 10 years, it has been falling down the rankings by market capitalization of European banks. In 1996, it ranked fifth equal with NatWest and UBS. Now its market capitalization is half of each of theirs, and it ranks 14th, behind Société Générale and just ahead of Crédit Agricole. It has been struggling for years to get its wholesale business right. The potential synergies from restructuring that business, along with the growth prospects of ABN Amro’s emerging-market network, might look attractive to another wholesale bank.
Size matters – in certain contexts. It doesn’t affect the daily running of the bank. ABN Amro won’t lose a project finance deal or an M&A mandate because of its market cap. It is still the Netherlands’ national champion; it still has a big balance sheet. The fact that UK mortgage bank HBOS has a market cap one-third as big again isn’t immediately relevant to a Dutch bank it doesn’t compete with. But as the pace of M&A begins to pick up in Europe, market capitalization suddenly becomes the only yardstick that counts.
Ten years ago, Lloyds TSB was the second-ranked European bank by market cap behind HSBC. It has doubled its market value in the interim but fallen to 11th in the rankings. Under Peter Ellwood’s leadership in the late 1990s it searched in vain for an acquisition in Europe but never clinched a deal. Now, under the leadership of Eric Daniels, its stable, strong cashflows might attract a bidder seeking some portfolio benefit from UK exposure. It would require a big bank to absorb Lloyds TSB’s low-growth business without risking a down-rating of its own shares.