There can be few industries that have changed as much this decade as banking. And there will be few that will change as much over the next decade.
Euromoney covers commercial banking, in one form of another, most months. But the fundamental shift the world’s banking industry is undergoing is so important (and often so imperceptible) that only a full examination of its ramifications can do the subject justice. That is why this entire issue is devoted to the subject of banking. What are banks for? Is lending dead? Where will the trend, through jumbo mergers, to ever-larger banks end? Will technology change the very nature of banks? Should banks be in the securities business? These are some of the questions this issue tackles.
The 1990s have been a period of astonishing (and almost unpredicted) success for banks. Think back to the start of the decade. Banks in Europe and the US had only recently emerged from the dark period of the Latin American debt crisis. They were still experiencing the fallout from the real-estate bubble of the late 1980s. Several top US banks, it was said, were technically insolvent. Citibank’s share price fell to below $5 (recently it rose to as high as $140) Few banks were very profitable: 15% was considered an exceptional return on equity. Many after write-offs were dangerously unprofitable.
Look what has happened since. The world’s best banks now make a return on equity of 25% or even, in the case of a handful such as Lloyds TSB, almost 40%. With only a few exceptions (notably in Japan) most are considerably better managed, with clear strategies, good control of costs and an almost fanatical focus on improving the return to shareholders.
What will make the next few years fascinating is that the world’s top banks now have open to them a range of options much larger than they have ever enjoyed before. In 1990 a big US bank, for instance, had little room for manoeuvre. It was basically barred from the securities business. The struggle to write off the mistakes of the past (and rebuild capital) made mergers difficult. The actions of European banks were even more circumscribed. In most countries even reducing costs was almost impossible because of the social taboo on firing staff.
Today about the only choice a bank cannot make is to continue as it is. In most jurisdictions, commercial banks can choose to get together with (or buy) an insurance business, an asset-management firm, or a securities operation. Conversely, they can just as easily sell any of these operations if they decide they don’t like a business they are already in.
Today a bank can decide to acquire almost any other commercial bank even one of the same size. There will be very few restrictions imposed by the competition regulators on the size of mergers. Therefore, hitherto unthinkable combinations Deutsche and Dresdner, Chase and Bank of America, Société Générale and Paribas will probably be allowed. Banks could just as easily decide to buy overseas as at home. Even quite big banks, on the other hand, could decide they need to sell themselves to acquire an attractive parent, as Belgium’s BBL did recently when it allowed ING to buy it.
The banks that will not thrive over the next 10 years are those that stand still, and those that dither on their strategy. Picking a strategy early and sticking to it is probably more important than picking the right one.
This is uncharted territory for banks. There is no longer a single model for what makes a successful bank. Ten or 15 years ago, Lloyds Bank was very similar to Barclays; Citibank was very similar to Chase. Now they are very different animals, and becoming more different every year. (Japan, as ever, is the exception. For fun, try asking a Japanese banker how Sanwa Bank differs from Sumitomo Bank. And, sadly, Japan is unlikely to change any time soon.)
There are plenty of risks too. It is by no means certain that the next few years will be as happy for banks as the last ones have been. The rare combination of sustained non-inflationary growth, technological change, and an absence of major world crises will not be repeated. With banks having such a broad range of strategic choices, some will undoubtedly use the opportunity (and their current excess of capital) extremely foolishly: by making an over-priced acquisition or entering an irrelevant new business. As Euromoney‘s Herbie likes to say, giving more capital to a bank is like giving another bottle to a drunk: you know what will happen, but you don’t know which wall it will happen against.
Banks will also stop being so different from other companies. They will need more expertise in branding, marketing and logistics skills familiar to any executive in industries such as motor manufacturing or retailing. They will differentiate between product and distribution, as pharmaceutical companies do. And they will become just as global as the biggest multinationals, not just at the level of big-ticket wholesale banking, but even at the retail level.
If you thought the last eight years were exciting, just wait for the next eight.
