Awards for Excellence 2016: Europe’s unwilling bank revolution

By:
Dominic O’Neill
Published on:

From Cyprus to Ireland, banks in Europe can boast some impressive turnaround stories. They now have the chance to help others and lead the wider transformation and consolidation that the sector so badly needs.

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Europe’s many transformation stories – though very impressive – are all too often defensive plays, rather than well-executed attacks. The single biggest and most important part of the transformation of European banking appears largely missing: consolidation.
 

The contrast outside Europe is clear. Euromoney’s best bank transformation stories in emerging-market regions are more usually about growth, often through M&A. Take Access Bank in Africa, which has grown, following a long line of M&A transactions, from 65th biggest bank in Nigeria in 2002 to one of its biggest today. In the Middle East, Al Ahli Bank of Kuwait’s transformation is also an acquisition story.

Though the fragmentation of European banking is particularly acute at the national level in Italy and Germany, one of the things that puts European banks on the back foot compared with their US peers is the dearth of continental operations and champions. The hope is that a new pan-EU regulator and pan-EU resolution framework will weaken the ability of national regulators to insulate their domestic banks from bigger and better operations in neighbouring countries.

The barriers are multiple, even to domestic M&A. Employee unions can hinder and delay deals to the point that they are no longer worth an acquirer’s time and effort. Then there is the regulator’s attitude – recognising the need for consolidation in theory, but being so fearful of individual deals that it sometimes discourages banks from trying. This year’s ECB demand for new capital at Banco Popolare before its merger with Banca Popolare di Milano – where trade unions are also a concern – is typical.

Across Europe, investors are understandably sceptical as to whether M&A will create value for bank investors, particularly big cross-border deals. Everyone remembers what happened to ABN Amro. Analysts at Berenberg, for example, sometimes seem to have a knee-jerk reaction to M&A discussions. But focusing on dividends does nothing to solve the sector’s fundamental challenges, and it might make mergers even more likely to be forced upon them in a crisis.

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Dominic O'Neill,
Euromoney
A single acquisition that is transformative in itself for a bank is therefore hard to conclude. More likely to be a success would be a series of smaller deals as part of a transformation project that targets incremental growth in specific markets, perhaps taking advantage of another bank’s less advanced turnaround. Think of ABN Amro’s acquisition of Credit Suisse’s onshore German private banking business two years ago, or the BNP Paribas acquisition of online securities broker DAB from UniCredit, also in Germany.

Transformation in European banking, particularly through M&A, can sometimes seem agonisingly slow, but the sell-off post-Brexit might herald another, possibly decisive, push in that direction, following the 2008 crash, and the sovereign debt crisis. Many of the best banks in Europe today are those that have remodelled their institutions, sometimes against the odds, after these earlier crises. Think not just of ABN Amro, but also of Lloyds Banking Group, or, after the eurozone crisis, of Allied Irish Banks and Bank of Cyprus.

These are banks that have refocused on their core strengths and taken action to reduce costs, often investing the proceeds in replacements for manual processes. The changes concern the complexity of their institutions; the countries in which they operate; the types of business they conduct; and the mix of assets on their balance sheets. The next stage cannot be a simplistic domestic or cross-border M&A, neither banks, nor the market, would countenance it.

For these revived institutions, acquisitions must instead be part of more thoughtful and nuanced approaches, taking into account where this market is headed. That does not mean ploughing money into the latest fintech gimmick. Just as important as technology is socioeconomic change, which demands savings products that cater better to the mass affluent, rather than just rolling out mortgages. The latter has been key to Intesa Sanpaolo’s Italian success so far; its European M&A strategy appropriately focuses on wealth management.

The task of transforming European banking is getting even more urgent. By 2018, €60 billion in excess capital in the sector could turn into a €160 billion capital deficit, according to KBW, given negative rates, slow economic growth, cyclical risks emanating from outside Europe, and new Basel regulations. Those that have cleaned up their businesses have the chance to move to a new stage of transformation, possibly helping other banks do their belated turnarounds in the process.

As Sicilian novelist Giuseppe Tomasi di Lampedusa said of another revolution: for things to stay the same, everything must change. In danger of being swept away by a globalized digital modernity, European banks face similar challenges today.