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It has been a very productive summer for François Narmon. Not only has the chief executive of Crédit Communal de Belgique signed an agreement with Crédit Local de France to create a European banking powerhouse. Symbolically, the 62-year-old banker’s second wife also gave birth to twins the month before the negotiations were concluded. Only six months before the July 9 signing, the athletically built Narmon had informed the six-person management board of his ambitious intentions to make Crédit Communal not just a Belgian but a world leader in lending to local authorities. Narmon, who was given the title of Baron two years ago, and is described by his colleagues and rivals as “a man of vision”, has spent his entire career at Crédit Communal, has been in charge of it for 17 years and is viewed in Belgium as practically the embodiment of the bank. In fact, his grandfather was an abandoned baby who was found on the site of Crédit Communal’s Boulevard Pachecho headquarters which at the time was a hospital. So the alliance in July of Belgium’s second-biggest bank (by assets) and the twelfth-largest bank in France was seen as a very personal one, forged by Narmon and Crédit Local’s chairman, Pierre Richard. The two men regularly chatted about a product merger when the Belgian a Crédit Local board member for eight years was in Paris for board meetings. Why the desire to merge? In spite of the 22% growth in profits last year, Communal was aware that its credit rating was under review. It did not have an international strategy and European monetary union looks certain to increase competition in its home market where it has a 99% market share not least from Crédit Local. Crédit Local, which has about half the French market in local authority lending, and has recently diversified with great success into the UK, Germany, Scandinavia and Spain, is also a very good fit nearly identical in size. The two banks hope to pool their resources Communal’s 970 branches in Belgium and Local’s borrowing expertise in the international capital markets to expand into the US and eastern Europe. The idea began to take a more serious turn about a year ago at an informal dinner in Brussels. Valére Croes, vice-chairman of Belgo-Dutch insurance-to-banking conglomerate Fortis, recalls that Narmon spent “75% of the meal” asking him how to structure a cross-border European merger of equals. This was exactly what Fortis did when it invented a revolutionary holding company structure six years ago, to merge AMEV, a Dutch insurer, with AG, a Belgian insurer. The Fortis structure has been duplicated in this Belgian-French merger. Each holding company owns 50% of each bank in a cross-holding under which the individual boards are retained and a joint management committee is created. Soon after the deal was signed (shareholders are likely to approve it in October), Narmon jetted off to Atlanta to watch the Olympic Games, where Crédit Communal continues its sponsorship of the Belgian national team. It is a suitable sponsorship for a bank which is more closely associated with Belgian national interests than most. So much so that at first glance it appears surprising that Narmon chose to carry out a cross-border merger rather than participate in a much-needed consolidation in Belgium itself. In fact up until January, despite the clear strategic advantages of the cross-border option, he appeared more interested in forging a domestic alliance. At the beginning of the year he commented that he saw the need for “a bigger Belgian bank”. His remark sparked a wave of merger fever during which the share price of Belgium’s third-largest bank (by assets), Banque Bruxelles Lambert (BBL), was forced up 5% in one day. Crédit Communal owns just over 12% of BBL, which is viewed as the most vulnerable of Belgium’s banks. BBL’s share price had been the subject of speculation ever since last August when its 65-year-old chairman, Daniel Cardon de Lichtbuer, admitted that he would like to create a large Belgian alliance before he retired in 1996. U-turn on consolidation Likewise, Belgian minister of finance Philippe Maystadt (a member of the same political grouping as Cardon both are French-speaking Christian Democrats) said in January that he agreed with Cardon’s vision. Elio di Rupo, the deputy prime minister, went further and advocated a Belgian merger, saying that under monetary union, “competition will become stronger, and Belgian banks will lose the protection and supremacy that the Belgian franc currently gives them on their national market”. This was something of a government U-turn. In the past it had discouraged large banking mergers in an effort to fight unemployment, threatening to boost taxes on bank profits if they resulted from large layoffs. The Belgian government is now concerned that its banking industry will suffer the same fate as its steel industry. It has pointed out, with some alarm, that the balance sheet of the largest Dutch bank is equal in size to a combination of five of Belgium’s largest seven banks (known locally as the G-7 or great seven). “It’s interesting to compare the Dutch and Belgian models,” comments Georges Ugeux, head of the privatization commission. “They consolidated much earlier. This is a major achievement for Holland, which is not much different to Belgium.” It was tentatively suggested in January that Crédit Communal might join with BBL and Générale de Banque. BBL and Générale de Banque alone would create one of the world’s top 20 banks, with assets of $300 billion. The speculation came to nothing and Narmon looked further afield. The suspicion was that Crédit Communal was too public-sector in style for the liking of the other two. In spite of all the merger talk, it is not immediately apparent that a grande banque belge is needed. Belgium’s banking system benefits from one of the world’s highest savings ratios. Its major banks make money. Even BBL enjoyed a 15% jump in its profits in 1995 to Bfr8.94 billion ($294 million). But the problem is European monetary union. And ironically, the Brussels-driven project when it happens is certain to hit the Brussels-based banks harder than most. Guido Ravoet, director general of the Belgian Bankers Association, points out that putting in place the infrastructure to cope with the euro will cost 7.5% of Belgian banks’ profits over four years, at a conservative estimate. The banks will also lose foreign exchange commissions. The Belgium Bankers Association calculates this will cost the banks 10% of their profits each year. Then, of course, there will be increased competition in the domestic loan market once the currency risk is removed for banks in the euro bloc. The demise of the currency union with Luxembourg in favour of a larger currency union will also hurt the Belgian banks (and the Belgian treasury). Currently, a large part of Luxembourg banks’ surplus cash is invested in short-term Belgian interbank deposits and short-term treasury bills. This is a particularly cost-effective source of funding for the banks. There is no currency risk on these instruments the key attraction for the Luxembourg banks. But, post-euro, they might move these cost-effective deposits anywhere in the currency bloc. But most important of all is what one Belgian banker referred to as the low quality of the profits the big banks have earned in recent years. About a third of profits arose from trading activity, principally in the government bond market. The Belgian banks hold 49.6% of outstanding government bonds (OLOs) and, in secondary trading, the primary dealers represent 51% of all activity, with the larger Belgian banks accounting for “the lion’s share”, according to the Belgian treasury. The result is that the so called G-3 Générale de Banque, Kredietbank and BBL have all made substantial sums in proprietary trading. Their very presence in a large trade can move the market in self-fulfilling fashion. The interest-rate environment has been favourable too. Post-euro, this advantage will be gradually eroded by competition from abroad, with a more open Belgian government bond market. All of which explains why calls for mergers between the 80 or so banks in the overbanked high streets of Leuven, Antwerp and Brussels have dramatically increased. But although everyone knows it makes sense, putting mergers into practice is not such a simple proposition. This is partly because of the formidable intra-regional politics in Belgium. There are divisions that proliferate along linguistic lines (French- or Flemish-speaking), religious grounds (Catholic or non-Catholic) and those of ideology (socialist or liberal). And banking loyalties are entrenched in all of these. Amid the talk of merging Générale de Banque, BBL and Crédit Communal, a key voice of dissent was Flemish minister-president Luc Van den Brande a sort of Belgian Newt Gingrich, for whom the words “Flemish interests” should be substituted for “budget deficits”. He objected to Gemeentekrediet (the Flemish name for Crédit Communal) falling into the hands of French-speaking interests because Générale de Banque is controlled by Suez in Paris, while BBL is more closely associated with Belgium’s southern French-speaking state of Wallonia. Crédit Communal/Gemeentekrediet is nearly 50% owned by Belgium’s northern federal state, Flanders. It is questionable how important this intervention was. But the failure of the domestic merger was the immediate catalyst for Narmon to hook up with Crédit Local a subject upon which Van den Brande has remained strangely silent despite the obvious French connection. His silence is surely a mark of how perfect a merger it must be. And yet perhaps more interesting is the short-term impact of what Communal’s Narmon will do at home. The direct result of the merger does not lessen the possibility of the grande banque belge happening. Paradoxically it increases the possibility of a large domestic merger because Crédit Communal still has its 12.52% block of shares in BBL. Narmon who in the 1980s taught accountancy each morning at the Free University of Brussels before going to the office, and is said to speak French with a Flemish accent and Flemish with a French accent may hold the key to its future. Last August he allied with Albert Frère of Groupe Bruxelles Lambert (GBL) and Royal Belge to form a shareholder control committee, which has since used its 37.3% stake to run BBL. This so-called French-speaking bloc outvotes ING Bank of Holland, BBL’s single-largest shareholder. ING tried to take over BBL in 1993. But the Dutch bank and insurance conglomerate lowered its offer at the last minute to Bfr3,100 per share from Bfr3,600. This provoked speculation, which proved unfounded, that ING’s team of corporate financiers had found skeletons in BBL’s loan book. BBL’s current share price stands at around Bfr5,750, having reached a high of Bfr6,200 earlier this year. Uncompetitive shareholders The shareholder control committee was formed hot on the heels of ING’s move to increase its 12.32% stake last year. It accumulated another 6.73% (of voting rights) through a special loan made to Italy’s Lefebvre d’Ovidio family which effectively gives it an option on the shares until 1998. This took its total stake up to 20%, which means ING can consolidate BBL’s figures in its group accounts. However, events took an unexpected twist in February when EU commissioner Karel Van Miert sent a letter to the members of the French-speaking shareholder control group asking them to abandon the pact because it was uncompetitive under Article 85 of the Treaty of Rome. The Flemish-born commissioner noted that to have a high street competitor (Crédit Communal) steering the management of BBL was not good for the latter. By April, Van Miert was still not satisfied with the four-page reply sent by the control group, which included examples of occasions when BBL had done things not necessarily in the interests of Crédit Communal proof that Communal was not a malign influence. A meeting between the parties concerned has been scheduled for September. A spokesman for the commissioner admits that he does not have the power to force any of the parties to sell their shares. So there are four possible outcomes. First, Van Miert could back down, although there is a slim chance of this happening. Second, he could be persuaded they are right, via the verbal presentation. Third, Van Miert could declare it uncompetitive and dissolve the formal pact, a state of affairs that would not, however, prevent the three voting together on key issues which would be a little embarrassing for the commissioner. But perhaps the most likely outcome will be a voluntary sale in response to a fear of those concerned about negative publicity. This is most pertinent to Narmon of Crédit Communal. It would provide him with a timely excuse to sell a shareholding which no longer has any strategic value since the merger with Crédit Local. (The block was purchased sporadically in 1993 at an average price of Bfr3,500 and so would realize a huge capital gain, with the share price over Bfr2000 higher today.) Management stresses Narmon recently said he has no intention of selling. However, secretary to the board and chief economist Eddy Plettinck told Euromoney that the stake had become less strategic. “It would be difficult to proclaim the opposite,” he said. “But it still remains a good financial investment.” Good portfolio investment or not, Communal, some suggest, would be better off using the funds to invest in opportunities in eastern Europe one of the key areas of expansion planned with Crédit Local. And, presumably, Narmon’s time will be at an even greater premium with the completion of the French merger. Does he have time to be on another major bank’s board? There are certain to be complex management issues thrown up by the merger. This is because the management of Crédit Communal and Crédit Local will only work together on international projects without merging their domestic operations. Valére Croes, the vice-chairman of Fortis, upon which the cross-border merger model is based, says: “If they are not putting in place one management board, then the structure is weak. If the strategy is, France is France and Belgium is Belgium, then I can guarantee that is a very weak solution.” The rumour in Brussels is also that Frère of Groupe Bruxelles Lambert, the linchpin investor in BBL, will sell provided the price is right. Frère, who lives in Charleroi, the same Wallonian town as minister of finance Maystadt, may likewise view it as an opportune time to sell, especially as the market has failed to build into the share price the possible negative impact of monetary union. Who would buy? Most likely Générale de Banque or ING. Générale de Banque and BBL have already tried and failed to merge. This was driven in January by Générale de Banque’s main shareholder, Société Générale de Belgique, which is controlled by Suez in Paris. The pipe-smoking boss of Société Générale, Viscount Etienne Davignon, later said it was ING that prevented the deal going ahead. It is assumed that ING still wants BBL, although ING’s official line on the incident is that it was not prepared to be diluted as this would hinder its ability to consolidate BBL into its accounts. According to one source, however, accountants have ways around this problem. But an ING spokesperson says: “We are quite happy with the situation as it is. Otherwise we do not comment on the Belgian banking area. We have elected to keep a low profile.” So much so that the spokesperson was unwilling, when asked, even to reveal the name of the Lefebvre d’Ovidio family, whose voting rights ING controls a mark of how seriously he takes not saying anything. Politically, ING has the backing of Van den Brande. Van den Brande likes to point out that 60% of BBL’s deposit base is derived from Flanders, which is richer than the French-speaking southern federal state of Wallonia. A strongly worded statement he wrote earlier this year noted: “In the current merger debates, it is remarkable that banks belonging to financial groups whose decision centres lie in Paris (Suez, UAP [an insurer], Crédit Local de France) pose as Belgian, while a Benelux bank such as ING is considered to be foreign.” The question is not whether ING has the political muscle, but whether it can stomach paying such a high price for BBL, bearing in mind the downward revision in its offer the last time it made a bid for the bank. Two recent court cases in Belgium supported the rights of minority shareholders, signalling that any bid would have to be for 100% of shares and not just for a block of shares purchased at a premium to the stock price. A Brussels source says that the Banking Commission recently rejected a plan to bring ING into the BBL control committee. Under this plan GBL, Royale Belge and Crédit Communal would offer ING options on their shares over a given period, thus diluting themselves gradually. The Banking Commission refused the plan, on the grounds that it would give ING control through the back door. Another view is that ING does not want majority control. If this is the case and should ING simply want a blocking minority of BBL stock, then under EU law, it would have to purchase 33%; although under Belgian law, a blocking minority is only 25%. Suez, meanwhile, continues to manoeuvre from Paris. Its Belgian subsidiary, Société Générale de Belgique, recently organized a credit line through Générale de Banque of Bfr20 billion. On top of the Bfr20 billion of cash it already has, this is a sizeable war chest ($1.3 billion). Brussels bankers say it has one of two purposes. The first is BBL-related, the other might be to buy out Frère’s 25% stake in Tractebel, an important Belgian industrial company with holdings in electricity and gas. Whatever Paris wants, it is not altogether clear that Générale de Banque’s boss, Ferdinand Chaffart, or his senior layer of management, are altogether in agreement. He made it plain in January he was not so keen on the BBL marriage. His strategy is to create a super-regional bank working through organic growth and acquisition, operating in a 400-kilometre radius of Brussels. He is looking for acquisitions in London and Germany, having already purchased Banque Parisienne de Crédit and Crédit Lyonnais Holland. Chaffart, who is not from a banking background and spent much of his career working in the cement industry, believes a merger with BBL will cause so many job losses one estimate runs to 5,000 that it will create political problems. He thinks the upshot is that Kredietbank would be the biggest winner, gaining a lot of disaffected clients at no cost. Obsession with control Eric De Keuleneer, formerly head of corporate finance at Générale de Banque and now head of yet to be privatized government mortgage bank Office Centrale de Crédit Hypothécaire, is vocal on the subject of bank ownership: “BBL has got some shareholders who would like to sell. In most industrial companies these blocks of shares would be sold in the market. In Belgium we have had, for a number of years, a particular weakness whereby many people are led to believe that each company needs a controlling shareholder.” He adds that most successful banks in other countries have no such controlling shareholder and do not seem to suffer for it. He would like to see more debate on this subject within Belgium: “If BBL could have a more stable, widespread shareholder base which respects its autonomy, it would be more profitable. Then, if it needed to, it could participate in joint ventures or mergers in the best interests of the bank instead of being pushed here and there in the interests of a controlling shareholder.” Merger talk is less common at Flemish-controlled Kredietbank, which stands out as a pillar of independence. With the best return on equity among the large banks at just over 13%, it is controlled by Almany, a Flemish holding company which has access to a poison pill in the event of a takeover. Its strategy is a simple one: to buy small savings banks in Flanders, such as the purchase earlier this year of Bank van Roeselaere for Bfr9 billion, and become a super-Flemish bank. The only merger suggestion it does not scoff at is with sixth-ranked bank CERA, which is a Flemish farmers’ bank, equally committed to serving the six million people of Flanders. The other major player is Fortis, which owns CGER-ASLK, and recently absorbed another government bank, SNCI, an industrial lender. It expects the latter acquisition to absorb its time until 1997, but as Valére Croes, vice-chairman of Fortis, admits, he receives calls each week with new offers. One of Fortis’s board members is Etienne Davignon, head of Suez’s Société Générale de Belgique. The only other member of the G-7 so far not mentioned is Bacob. As a trade union bank, it is ideologically opposed to mergers that might result in job losses. |
