Conventional wisdom consigns banks in the middle ground to oblivion. To prosper, the argument goes, smaller banks must either accept eventual merger or acquisition, or find niches in which they can demonstrate that their size is an advantage rather than a handicap.
To see whether the consensus holds true, Euromoney journalists interviewed the senior executives of a representative sample of Europe’s banking Mittelstand to get first-hand these institutions’ blueprint for survival. Will any of these banks be here in three years?
BW-Bank
A traditional institution that believes its market is impregnable is unlikely to prosper. UK institutions talked like BW after Big Bang. Just a handful remain
We mention the euro. “I just don’t want to hear that word any more,” grumbles Frank Heintzeler, chairman of the board of management at Baden-Württembergische Bank. “For us last year wasn’t about the euro, it was about efforts to increase fee income and keeping abreast of the market during the autumn decline. It’s been about our customers selling securities before the year-end for tax reasons. As for the euro, it was sewn up by mid-1998 as far as the board was concerned.”
For this Stuttgart-based regional bank, which is 26% owned by the state but likes to think of itself as in the private sector, the real highlight of 1999 is the promise of two or three “golden years” as local rival Landesbank Baden-Württemberg – the merged product of three state-owned banks – slowly gets onto its feet, says Heintzeler.
This year, BW-Bank will also be concentrating on improving its credit risk management system, developing its retail strategy and acquiring new customers.
BW-Bank was banging the drum for the euro pretty early on. Heintzeler admits that it was “scared stiff” of being caught unprepared. The euro team was 60 to 70 people strong – 3% of the bank’s workforce – engaged full-time for much of last year. “Out of 26 weekends our IT staff worked 19,” project leader Michael Molliné says. And what about him? “Well, I did a few more than that.” Nevertheless this bank doesn’t expect much additional business following the single currency’s launch.
Since BW-Bank is a regional bank – Heintzeler says most clients use a local cooperative or savings bank as their principal banker, plus BW for specialist products – it has no ambition to move beyond its traditional client base of medium-size companies in Baden-Württemberg, south-west Germany. The corporate-finance team is expanding to help these clients engage in mergers and acquisitions and equity financing.
For multinationals, BW-Bank offers a few products such as securities and forex trading, but it refuses on principle to lend because margins are so slender. Currency-trading revenues declined by 30% with the launch of the euro, but because the bank saw the problem coming, it compensated by beginning new trading activity in Swiss francs and yen. That made good the loss, says Heintzeler.
The single currency has in fact changed nothing about the bank’s basic approach to the European market, which is based on commercial-banking cooperations and foreign desks located with its European partners: the Royal Bank of Scotland, Banco Urquijo of Spain, Banca Populare di Verona and others.
These cooperations may make commercial banking efficient but they still seem to miss out on obvious opportunities. Take equity research. BW’s equity-research team has been increased from five to 20 to make possible pan-European sectoral analysis. But although they confer with counterparts at partner banks, the analysts still double up the workload by producing their own research across the board rather than buying in contributions from French, Spanish and British partners.
In the longer term, BW’s management sees opportunities to discover new clients for specific products. Cash management, for instance, is not yet a European business, Molliné points out. Even multinationals like Hoechst, which do their own Target payments without a bank as intermediary, still have no Europe-wide cash-management systems. “In five years’ time the standards will start to become established,” Molliné says. “It won’t be Swift; I personally believe that banks will set an industry standard on the basis of internet technology. For the time we are in a two-year vacuum waiting to see which medium it will be.”
Heintzeler, a former head of corporate finance at Deutsche Bank, likes to describe the local Baden-Württemberg market as impregnable. “This is a very relationship-oriented market and is very difficult for outsiders to get to grips with. Companies are secretive, and new banks in the market will find it almost impossible to find out anything except their turnover figures. But we know their whole histories, their hobbies, their families and their lovers.”
The flipside of that argument is that Baden-Württemberg is not attracting many newcomers because it is already overbanked. Margins have slimmed down even further over the past two years as L-Bank, Landesgirokasse and SüdwestLB have garnered market share in preparation for their merger to form Landesbank Baden-Württemberg.
Despite its claim to be a product-focused specialist, BW-Bank is still a classic interest-margin earner – just 20% of earnings come from commissions. The long-term aim is to increase that to 40%. Laura Covill
Banco Popular Español
Spanish banking is already so competitive and open to foreigners that smaller banks say they have little to fear from the introduction of the euro
Spain’s Banco Popular is one of the few banks in Europe that seem to have got nearly everything right so far and are not scrambling to invent new strategies as a response to competition. Directors at this medium-size bank for retail and small-corporate business seem to have enjoyed rebuffing the takeover speculation that inevitably surfaced after the surprise merger of Banco Santander and Banco Central Hispano in January.
Theoretically, Popular looks like the perfect candidate for a takeover bid, except for the fact that major shareholders, including Allianz, own 31% and seem content for the bank to continue on the same lines.
Nor is there any apparent concern about new competitors from abroad, either in the retail or corporate markets. “The Spanish market is already highly competitive, so there would be no substantial consequences if more players arrived,” says José Ramón Rodríguez, a member of the board of directors.
In fact the competitors preoccupying chief financial officer Roberto Higuera are rival borrowers. Popular has an established EMTN programme, launched in 1997 and has already issued two-thirds of its $2 billion volume. But the bank borrows more cheaply, thanks to a better rating, via mortgage securitizations. Recently Higuera asked Morgan Stanley and JP Morgan to devise a “Pfandbrief-type securitization” that would be cheaper still, make issuance possible within one month rather than three or four and, crucially, would be recognized as collateral with the European Central Bank. “Initially these securities would only be used as collateral,” says Higuera, “but it could get to the point where we could think of issuing ‘Pfandbriefe’ to be placed with institutions.”
The European single currency is not perceived by Popular to be an opportunity, since its customer base will remain unchanged. Rather, the euro is seen to be a kind of trip-wire that might hinder the achievement of its usual long-term objectives.
The single currency has in fact had a devastating effect on Spanish banks: interest rates have fallen far and fast – consumer mortgages are now cheaper than German ones – devastating interest income. It is, Rodríguez claims, “practically impossible” to undercut Popular’s rates and commissions.
It was a painful experience but it’s already over. Popular does not expect the interest margin to decline any further. Unlike most banks, it has managed to compensate for the loss in interest income by doing more cross-selling. Last year the volume of personal pensions increased by 30%, commercial mortgages by 32%.
Corporate finance also offers opportunities, even though Popular’s clientele is generally medium-size businesses. In particular, a large number of Spanish companies are considering initial public offerings.
The loss of forex business has been too large to be compensated for by such new business yet. Tourism and a strong export trade in the Mediterranean region traditionally supplied large volumes of currencies from what are now euro-zone countries, a significant source of revenue for Spanish banks even if they didn’t do much own-account trading. “We were very active in all euro currencies and are relatively active now in sterling, US dollars and so on, but not enough to compensate,” says Higuera. But this isn’t a signal for Higuera to expand his limited own-account trading, which is mostly intra-day. “We don’t believe in compensating income by increasing risk,” he says.
Popular has also been hit by the elimination of the currency-exchange element in cross-border payments. This was traditionally a big business because of the huge amount of money sent by relatives working abroad to the bank’s 4 million retail customers in Spain.
The greatest difficulty facing Popular is that it has to go on investing to earn more retail and corporate customers. The branch network needs to be reorganized and automated further; the quality of service needs additional improvement, customers need more investment products based on European securities. These investments are problematic for Popular, which prides itself on reducing its cost base every year. After a 15-year campaign, the cost-income ratio is down to 44%, the best of any Spanish bank.
Thanks to the single currency and the resultant fearsome competition in Spain, Banco Popular feels it has to work harder than ever to stay on course. “We have a very difficult challenge, earning more profit every year, ” says Rodríguez. Laura Covill
Bayerische Landesbank
Landesbanks feel secure despite Emu. Their local Sparkassen support them, and lending to the public sector is a low-risk, high-margin business. But for how long?
To discover which European markets count for Bayerische Landesbank, simply read the international destinations on the departure board at Munich railway station.
In Vienna and Venice, Innsbruck and Milan, Bolzano and Budapest, this large state-owned German institution has a reputation as an aggressive invader. Over the past two years Bayerische has secured 49% of Bawag, a large Austrian bank; 75% of the Hungarian Foreign Trade Bank (known as MKB), number-two in its national market; plus a shareholding in northern Italy’s Südtiroler Sparkasse.
In November Bayerische caught the train into southern Austria. The country’s bankers were furious with the Germans for snatching a strategic stake in Tiroler Sparkasse after a two-year struggle. Tiroler’s defection caused a rift in the Austrian savings bank network, as other Sparkassen refused to share their systems and products with the Germans.
Austria, Hungary and northern Italy are the nearest markets for Bayerische’s customers. Some are in euroland; some are not. But they are growing into an integrated economic region, Bayerische argues, and the bank believes that German customers require it to have a substantial presence throughout the region, as well as in eastern Europe. By purchasing shareholdings in existing banks, the German newcomer has gained instant market share. “We don’t want to lose customers to the competition,” chairman Herbert Lehner says.
But in other European markets, Bayerische is about as aggressive as a dormouse.
The bank does no real business in Spain, Portugal or Scandinavia, for instance. “We’ve told the press on many occasions that we would like to expand into Iberia,” Lehner says. True, the German newspapers faithfully parroted this again after a pow-wow with Lehner in late January. So why doesn’t the company go ahead and expand? “We don’t believe in takeovers. Besides, Spanish banks are too expensive at the moment,” says Lehner. But why not open a branch in Madrid right now? “Well, we don’t have anyone who could run it,” he retorts.
Admittedly Bayerische Landesbank has a small management team. But it is not that small. The truth is that Bayerische sees little prospect of significant return from an investment in Spain or Portugal, both notoriously competitive and overbanked markets. As in northern Italy until recently, the bank’s policy is to hang back until the risk of losing German business forces it to invest in these new European markets.
The real point of Bayerische’s international business, according to Lehner, is to do enough to keep German customers happy, specifically the 100 local savings banks (Sparkassen) in Bavaria and their corporate customers. “We just can’t avoid the business because we do it for our German customers,” he says of the bank’s now-notorious Asian ventures which lost Bayerische some Dm800 million ($474 million) last year.
At the same time the bank doesn’t believe in expansion for its own sake and is loth to enlarge its management. “This bank is the product of a merger and it took years to settle down,” says Lehner. “We don’t want to spend time navel-gazing.”
One big asset of Bayerische, he argues, is the ability to make decisions quickly. “Sometimes we got the deal simply because we came up with a decision within three or four days.”
Defensiveness is the main feature of Bayerische’s entire strategy. After all, it has a lot to lose. Other bankers, even other German Landesbanks, are deeply envious of Bayerische’s ability – or luck – when it comes to keeping its domestic client base intact.
Unlike the Sparkassen in other German Länder, the Bavarian Sparkassen are too small to tackle their own wholesale business and seem reluctant to merge. Only Stadtsparkasse Munich has its own trading desk. The other 99 banks almost exclusively use Bayerische Landesbank for treasury, securities, forex and money trading, as well as bulk payments, cash management and asset management. Apparently Bayerische’s rates are highly competitive. Equities research and sales support come entirely free of charge.
For Bayerische, the great thing about Emu is that its own home market is not suddenly threatened by newcomers. Lehner is clearly confident that the Sparkassen or their customers will not be targeted by foreign banks – except, perhaps, in investment banking, particularly IPOs and mergers. Even the Sparkassen talk about their “close personal links” with Bayerische managers. Supporting their local Landesbank is in their self-interest, they say (the Sparkassen jointly own 50% of Bayerische). They seem entirely content with Bayerische’s 7% dividend, which hasn’t been adjusted for years. After all, it is higher than the dividends paid by other Landesbanks.
One-third of profits comes from lending to the public sector in southern Germany, Lehner says: “It’s risk-free business and a wonderful thing with interest rates falling all the time.”
Nevertheless interest margins are only 0.69%, worryingly low for a bank that makes more than three-quarters of its earnings from interest rather than commissions.
Despite all the captive business from the Sparkassen and a cost-income ratio of only 43%, Bayerische Landesbank achieves an unremarkable return on equity of just 17% before tax. The long-term aim is 20%, compared with 25% at Deutsche Bank.
Although Lehner is reluctant to admit it, a fair proportion of the international business is clearly intended to increase revenues to make up for indifferent margins at home in Bavaria. One-third of operating profits are generated by international business, which is startlingly racy by comparison with the bank’s other operations.
Bayerische Landesbank is often seen in major financing all over the world, particularly in Asia. Its London and New York operations are major syndicated lenders and M&A financiers, although it is doubtful they are particularly profitable.
But these ventures have had mixed results. Like an ingenuous tourist, Bayerische was badly burnt last year by dubious deals in Asia and Russia. Speculative investment loans to private individuals in Malaysia – which the bank claims were caused by local managers in Singapore exceeding their authority – went disastrously wrong. Bayerische lost Dm770 million. Provisions on Russian and Asian exposures alone totalled Dm1 billion. Those are the losses we know about; the bank is not publicly listed and therefore under no obligation to give full details.
The Moody’s financial strength rating – which was devised specifically to reveal the truth about state-backed banks like Bayerische – was reduced from C+ to C as a result of the Asian losses. That was bad news for a major euromarket borrower, even one with a triple-A rating thanks to its state guarantee.
Last year’s embarrassing losses have prompted local politicians to question Bayerische’s adventuring in world business. Lehner responded defiantly by itemizing some of his riskier exposures (Brazil, Dm300 million; China, somewhere between Dm300 million and Dm500 million) and refused to change his approach. Making more money, he says, is Bayerische Landesbank’s biggest challenge ahead.
This is where euroland may actually offer Bayerische Landesbank some new opportunities – and a reasonable return. Project finance, real-estate financing, trade finance, securities trading and sales are all areas where Lehner hopes for more business from users of the single currency. Laura Covill
Banca Nazionale del Lavoro
Its privatization behind it, BNL believes that the first phase of eurozone consolidation will be domestic. So the bank will focus on Italian, not cross-border deals
Despite its 86 year history, a new era is dawning for the management at Rome-based Banca Nazionale del Lavoro (BNL). The former state-owned bank was privatized last November and has entered a new phase in its development. Spain’s Banco Bilbao Vizcaya, Banca Popolare Vicentina, a retail bank from northern Italy, and Ina (Italy’s National Institute of Insurance) represent the core shareholders, with respective shares of 10%, 7.75% and 7.25%. The remaining stakes in the bank are shared between thousands of institutional and retail investors, across Italy and abroad.
Although now behind it, privatization was neither painless nor easy for BNL. A joint bid in June from Ina and Credit Suisse to buy a 25% stake in the bank from the treasury was rejected last summer because the price was too low. In July chairman Mario Sarcinelli resigned acrimoniously after a clash over the privatization strategy with treasury minister Carlo Azeglio Ciampi and was replaced on August 7 by Luigi Abete, former chairman of Confindustria, Italy’s industry association.
Having concentrated all its efforts trying to ensure a smooth transition from private to public status, BNL is now facing a number of problems spawned by the introduction of the euro. Managing director Davide Croff explains that the management has been focusing on privatization for most of the last year and has had little time to think about the new currency. “It is clear that the privatization took a lot of our energies,” he admits.
So far, the issue has been addressed largely in technical terms. In 1998 the bank spent around L160 billion ($93 million) adapting its computer technology for the arrival of the euro. In terms of European strategy, however, the firm is less prepared. Although many competitors have already signed strategic alliances abroad or have been feverishly active in the process of domestic consolidation, BNL is waiting to see what the new shareholders want. Croff stresses that they have only just come on board and that it is imperative to discuss any future moves with them before rushing into anything.
It seems that the bank is not yet prepared to enter into cross-border deals and there are no plans, certainly in the short term, to buy abroad. This despite much speculation to the contrary among analysts in the light of Banco Bilbao Vizcaya’s stake in the company.
Instead, BNL will be looking for opportunities in the Italian market and Croff is convinced that the company’s approach is sound. “The worldwide consolidation process is still at the first stages in the banking sector. So far, if we exclude some marginal exceptions, the mergers have been domestic all over the world,” he says. “It is still too early to look abroad. We need to strengthen our position in the domestic market first. Nevertheless, we should be prepared to face an acceleration of mergers even cross-border.”
At the end of 1997, BNL was the fifth-largest banking group in Italy, with assets totalling $103 billion. It is one of the few Italian banks to be represented throughout the country and also has several subsidiaries across the world, most notably in Latin America and Germany. However the group lacks the regional focus that would enable it to have a stronger presence in the retail market, an important omission given that Italy has the highest savings ratio in Europe. Some believe this could be achieved through a merger with Banco di Napoli, a bank controlled jointly by BNL and Ina. The wisdom of the deal has been questioned, however, because it would expand BNL’s presence in the poorer areas of the south rather than the richer north. Banco di Napoli is also renowned for inefficiency and has come close to bankruptcy and been bailed out by the government more than once.
In many ways the challenge Croff faces – to make BNL competitive on an international scale – appears to be a difficult one. Since becoming chief executive officer 10 years ago, however, he has made considerable headway. When he took the helm, BNL was still a fully state-owned bank, facing the political pressures of the various succeeding governments and suffering considerable financial instability. Under Croff’s guidance, the bank has improved financial performance and has undergone a successful privatization.
But now Croff is facing the most difficult part of his task. He must reorganize the bank and make it profitable – in 1997 it posted losses of some L2.8 trillion ($1.6 billion); in 1998 it made a small profit of L7 billion. A business plan has been already approved to this end. Its main targets are a 12% return on equity and a staff reduction of 3,300 by 2001. The bank is also planning to adopt a more aggressive approach to the marketplace by shifting staff from accountancy to financial-product sales, and by introducing bonuses linked to productivity. This will require a radical change in mentality for many employees – working for a bank such as BNL (until last November state-owned) has long been regarded as one of the safest jobs on earth.
Such measures are necessary, however, says Croff, with the new unified market having a negative effect on current cashflow. Spreads between lending and borrowing rates are falling and the bank is making reduced commissions on foreign exchange. On the benefit side, however, he does stress that there is an incentive for greater efficiency. “The euro is for Italian banking what the Maastricht criteria have been for Italy: a big stimulus to put the situation in order.”
Croff believes that technology will play an important role in increased profits for BNL. He believes that everyday banking activity will increasingly be carried out through remote banking services and wants his bank to be prepared. “At that point, a wide coverage of the territory will not be as important as it was in the past and we will have to face big competitors from Frankfurt or Paris,” he says. BNL already offers its customers more than 18,000 remote-banking terminals and a specific intranet network for corporates.
In the meantime, it has increased its commitment to technological development by signing a joint-venture contract with UK telecommunications company BT, Italy’s largest energy company ENI and the country’s largest private media company Mediaset. The four have come together to create a new telecoms company, Albacom. BNL hopes that this will help to develop synergy in its distribution of financial products – the way forward, according to Croff. Luciano Mondellini
Banca Popolare di Bergamo-CV
Protected from hostile bids by its Banca Popolare status, Bergamo’s aim is to hold on to its number 10 to 13 ranking in Italy. Only if that is threatened will it look at deals
“Once you have reached the critical dimension to compete on prices with the giants, being smaller can be an advantage in terms of flexibility and swiftness in taking decisions.” With these words, Giorgio Frigeri, general manager of Banca Popolare di Bergamo-Credito Varesino, sums up the philosophy of his bank.
With L32 billion ($19 billion) of customer deposits, the group is placed around twelfth in Italy’s retail banking league tables. It has branches all over the country, although most of its business is concentrated in Lombardy, Italy’s wealthiest region.
The performance of Popolare di Bergamo, which was founded in 1869, has in many ways mirrored that of the region in which it is headquartered: its acquisition strategy started in the 1960s, when the north of Italy was experiencing its economic boom and becoming an industrial society. During the 1970s and 1980s, and well ahead of the recent consolidation process, the bank purchased several smaller competitors across the country. But the biggest move came in 1992, when it merged with Credito Varesino, a retail bank that was the market leader in one of the richest and most industrialized provinces of Italy.
In the meantime, it had opened branches in a number of cities that were important commercial locations for Lombardy’s manufacturers, including Lyons and Munich. It also established representative offices in London and Singapore. In 1994 the bank strengthened its international operations by acquiring Switzerland’s Banque de Dépots et de Gestion (a bank operating in Lausanne, Lugano and Neuchâtel), which specialized in asset management.
This was part of a general strategy to tackle foreign competition following the introduction of a new banking law in 1993. The new legislation allowed ordinary banks to lend money in the long term and to acquire industrial shareholdings.
Popolare di Bergamo reacted by creating a complete range of corporate-finance services. “We never thought of purchasing stakes in companies, but we wanted to create all the necessary conditions to prepare our clients for raising money on the capital markets,” says Frigeri. He is particularly pleased with the results: “That was the most important challenge for the bank and we met it,” he claims.
Asset management was the other key element in facing the competition. Despite the acquisition of Banque de Dépots and de Gestion, Frigeri admits that the bank still has to improve on this front. “We need to become a company that provides high-quality performances.” For this purpose, Popolare di Bergamo will use external services where it does not consider itself experienced enough in its own right. “We could do Europe, but if some clients want to invest in Latin America or use very sophisticated financial products, we will require the assistance of the major investment banks,” says Frigeri.
In contrast to many of his rivals, he plays down the negative effects of the euro on the Italian banking system and is resolutely optimistic. “The real turning point was the [banking] law of 1993. We will not change our approach for the euro,” he says. The bank’s future strategy does not include any cross-border alliance according to Frigeri, and it will only involve a further acquisition in northern Italy should it be necessary in order to maintain its position. “Our bank is between the tenth and thirteenth rankings in the country. We will expand only if we need to in order to hold on to this position. As I told you, we are happy with our size,” he says.
On the defensive front, the particular status of a “Banca Popolare” means that a takeover by another bank would not be easy. Shareholders have a per-capita vote, irrespective of the number of shares held, and every shareholder is entitled to hold up to 0.5% of the bank’s share capital.
Frigeri denies any problems from the loss of foreign-exchange commissions, claiming that it was only a small part of the bank’s business. Neither does he seem concerned about the falls in margins that so many other Italian banks are complaining of at the moment. “The margins,” he explains “tightened last May in the northern regions. We have already overcome this problem here and now we are experienced enough to cope with it in other parts of the country.”
As the competitive pressures of the euro grow over the next few years, we will see whether Frigeri’s optimism has been justified. Luciano Mondellini
Banca Popolare di Milano
Too small to make strategic alliances but blessed with a branch network in Italy’s richest enclave BPM is looking for strategic alliances in key regions
Banca Popolare di Milano (BPM) is headquartered in the heart of central Milan within the labyrinth of lanes and squares that surround many of Italy’s most prestigious banks. It is the largest cooperative bank in Italy in term of balance sheet with assets of L41.5 trillion ($23 billion) at the end of 1997. Founded in 1865, the bank has stuck, despite the passage of time, to a principal rule: one head, one vote. Every shareholder has one vote whatever the percentage of capital owned. To some, BPM is seen as a relic from the past. But over the years it has managed to adapt to the ebb and flow of Italy’s economy and become a vital part of the country’s banking system – not only for retail investors, but also as a credit provider to corporates and wholesale customers.
BPM has managed to achieve this position of strength thanks largely to the fact that some 322 of its total 499 branches nationwide are in Lombardy, Italy’s wealthiest and most industrialized region. The bank’s net profits for the six months to June 30 1998 were around L167 billion, up 284% on the previous year.
Over the years, the bank has concentrated on helping manufacturers in Lombardy to develop their business in Italy and abroad. The same philosophy seems to be driving the bank’s strategy following the introduction of the euro. BPM is aware that it is too small to make cross-border acquisitions so its survival strategy in the unified European market hinges on strategic alliances with banks in the markets that are most important for Lombardy’s manufacturers.
France and Spain have been the first targets. “We signed a very strong agreement with Crédit Mutuel and Caja de Ahorros & Pensiones de Barcelona (La Caixa),” says Ernesto Paolillo, deputy general manager of the bank. “They give us a complete coverage of their national territory and our customers will find every kind of service they will need in their branches – as if they were dealing with us. They will be able to open current accounts, receive credit cards and even open credit lines on the same terms,” he explains.
But the real target for BPM at the moment is Germany, Italy’s biggest commercial partner and the primary recipient of much of Lombardy’s manufacturing. As in Italy, the German banking system is characterized by a large number of regional banks. BPM is not big enough to deal with giants such as Deutsche, Dresdner or Commerzbank, and is therefore trying to sign several commercial agreements with the smaller banks. It has already signed an agreement with Stadtsparkasse Köln (a Cologne savings bank) and is currently negotiating to find a presence in Bavaria. Until it has increased its activity in Germany, expansion in other countries is expected to be put on the back-burner.
BPM’s domestic strategy has concentrated on acquisition and product diversification. Ahead of the consolidation that has characterized the Italian banking sector over the past two years, BPM bought some small banks in Rome and in the southern region of Puglia. Now the company has realized that it needs to refocus on the richer areas of the north to increase its shareholder value and its return on equity, which at the moment stands at 13%. That means it has to square up to a large number of competitors eager to buy the small but wealthy retail banks in the north of the peninsula.
BPM lost the recent battle for ownership of Banca del Monte di Parma (a retail bank in the Emilia Romagna region) which ended up in the hands of Banca Monte dei Paschi di Siena. However this has not discouraged the Milanese bank, which is still eagerly looking for acquisition opportunities. “We want to buy in Veneto and Piedmont and in the meantime improve our leadership in Lombardy,” explains Paolillo.
BPM needs to grow not only to keep pace with its competitors but also because its customer base simply isn’t big enough to support the number of financial products it has on offer. Last year, when increased competition tightened the margins that have traditionally been the primary source of profit for Italian banks, BPM reacted by enlarging its range of financial products. A new life insurance company, BPM Vita, and a leasing subsidiary, BPM Leasing, were launched. The areas of asset management and investment banking are forecast to provide the biggest profits in the future, however. “We have to replace spreads with fees and become a bigger investment bank,” claims Paolillo. With this in mind, BPM created an asset-management company, BPM Gestioni, and in September 1998 bought Milan-based investment bank Banca Akros.
Paolillo acknowledges that asset management and investment banking are becoming increasingly competitive in Italy, with foreign players keen to poach clients from the domestic banks. “Except for Deutsche Bank, which is already here, I doubt that European banks will descend to Italy to do normal retail banking.” he says. “Our spreads are now so tight that there is no room. But we have to fear them in the more profitable areas of asset management and investment banking.”
Paolillo also explains that Italian banks are facing another threat from beyond the Alps. Funds operating in Italy (both domestic and foreign) have to deduct taxes on clients’ earnings at source. This does not happen in other markets, such as Germany, and many managers fear it will not be long before clients begin to invest their money elsewhere – especially in the light of the introduction of the single currency.
Keen not to be caught off guard by Emu, the bank invested a considerable amount of money in preparation for the introduction of the euro. Notably, it adapted most of its computer processing systems in 1998 and is already reaping the rewards.
In January 1999, the first month of the new currency, the bank’s turnover was double the monthly average for 1998. “We have been more efficient than our competitors and the customers have appreciated our efforts,” says Paolillo. Luciano Mondellini
Casse Venete
One of the banks that prospered as the Veneto region was transformed, Casse Venete is now on the verge of a major merger that should take it into foreign markets
Few people outside Italy have heard of what is called there “the miracle of the north-east”.
Over the past 25 years, the region of Veneto – which encompasses Venice – has lead an economic boom that has transformed a former land of emigrants into one of the richest areas in the country boasting an unemployment rate of near zero.
Everything started in the 1970s, when many of the big companies in the north-west of Italy found it cheaper to delegate parts of their production processes to smaller companies in rural areas. A large number of small and medium-size companies were founded in Veneto as a result, especially in industries such as clothing and footwear. Over the years, they started to export to the surrounding markets of Austria, Germany and central Europe.
Several banks grew up alongside the Veneto manufacturers, to provide the firms with the financial assistance they needed. Many of these now rank among the largest banking groups in the country.
Recent banking consolidation in Italy has forced the Venetian banks to make some clear strategic decisions. Some have taken the route of merger, including Cassamarca di Treviso and Cassa di Risparmio di Verona, which have joined forces with Credito Italiano to create Unicredito Italiano, Italy’s largest domestic bank in terms of market capitalization. Others, including Casse Venete, have chosen to pursue growth through acquisition.
Originally, the Casse Venete group was formed by the merger between Cassa di Risparmio di Padova e Rovigo and Cassa di Risparmio di Venezia. At the beginning of this year, two other regional banks, Cassa di Risparmio di Udine e Pordenone and Cassa di Risparmio di Gorizia, were bought as part of the Casse Venete group’s acquisition strategy for the new unified European market.
Now the group, which is already among the top 10 banks in the country, with 455 branches and a total deposit of L47,000 billion ($28 billion), is planning the biggest deal of its history: a merger with Casse Emiliano Romagnole.
The move would make it one of the largest banking groups in the country, with great strategic importance. Casse Venete and Casse Emiliano Romagnole are similar in terms of size and have the same kind of clients: domestic customers and small-to-medium-size companies.
The regions where the banks operate are neighbouring, and the merger would create a retail group that would be market leader across a wide and wealthy area, stretching from the Austrian and Slovenian borders to central Italy.
The details of the merger are to be finalized within the next few weeks and Alfredo Checchetto, Casse Venete’s general manager, is confident about the successful completion of negotiations and is already planning strategies for the new group. It appears certain that the bank will look beyond its national borders. “Once the merger is defined, we will sit at the table and start looking abroad for a foreign partner,” he says.
Checchetto has clear ideas about the characteristics of the foreign bank. “It has to be a European bank with a complete coverage of euroland as well as markets such as eastern Europe, which are very important for our customers,” he states.
He also has firm ideas about the nature of the alliance, which he hopes will provide special initiatives for those clients eager to start businesses abroad. “We will require this bank to help our customers in finding the right sales agent, the right place to set up a factory and all this type of assistance,” says Checchetto. He says that the deal would not include any commercial interchange. “We are not going to sell its financial products in our branches and we will not ask it to sell ours – at least initially,” he says.
In the meantime, the bank has been active in other sectors to compensate for the falls in margins following the introduction of the euro.
Casse Venete and four other savings banks jointly own Eptafund, a Milan-based financial company that the bank uses as its asset-management arm. Checchetto is particularly pleased with the exclusive contract that Eptafund has recently signed with Alliance Capital Management, a New York-based asset-management company. “It will enlarge Casse Venete’s business and it will give us access to the US, the emerging markets and small-cap securities,” he says.
Falling margins are not the only things hitting Italian banks’ coffers as a result of the introduction of the euro, says Checchetto. He is also concerned about non-European banks’ current accounts. “Before, a Japanese bank had a current account in every country in Europe. Now it will need only one in the whole continent and Italian banks are likely to be penalized in favour of those in more efficient financial markets such as Frankfurt or Paris,” he warns.
Another problem is the control of the central bank. Checchetto explains that before the euro, banks had to provide the Bank of Italy with accounting information on the preceding month by the 20th day of each month. Now the deadline is the 12th working day of the month, which Checchetto says creates problems for normal banking activity.
“But the most worrying thing,” he says, “is that many people are undervaluing the euro. Most of our customers still invoice only in lire and our initiative to promote current accounts in euros is going slowly.” Despite the rising euro-mania, Italy will be Italy. It is another three years before Italians will have to carry euros around in their pockets instead of lire, so why do today what you can put off until tomorrow?
“There are still three years;” say the customers, “we’ll do it sooner or later.” Luciano Mondellini
Crédit Commercial de France
An unashamed niche player, CCF believes its size is no hindrance to profitability. However, the bank has been making acquisitions to boost its presence in investment banking
Since its privatization in 1987, Crédit Commercial de France (CCF) has occupied a unique position in the French market: it is the only medium-size bank that is fully listed on the Paris stock exchange. Its total assets amounted to Ffr399 billion ($66.5 billion) at the end of 1997. “CCF is a niche player, it has no ambitions to be big,” says Edouard-François de Lencquesaing, executive vice-president in charge of logistics and operations at CCF. “We are convinced that we can leverage our small size.”
The bank’s focus on retail, investment and private banking has yielded results that outstrip its peers. Domestic retail banking generates one-third of total profits, with 29% coming from investment banking and 12% from asset management and private banking.
CCF’s return on equity of 13% gives it the title of France’s most profitable bank and its average profit growth of 23% a year makes it the fastest-growing bank in France. Emu has given it access to a wider pool of customers but may leave it more susceptible to takeover by a larger player.
In retail banking, CCF and its regional subsidiaries, such as Crédit Commercial du Sud-Ouest and Banque de Savoie, have a total of 475 branches and offices throughout France. CCF has a market share of just over 2% in customer lending, compared with the 6% each of Société Générale and BNP. During 1997 CCF split its retail network into different types of specialist branches including those that can better cater for corporate customers. One of CCF’s retail priorities is to attract more self-employed professionals, a sector it considers to be growing rapidly.
As part of the bank’s preparations for Emu, CCF has joined the IBOS alliance to facilitate cash management across Europe. Other partners in the project include Royal Bank of Scotland, ING, Kredietbank and Santander. “We have re-engineered back-office banking and formed partnerships in other countries,” says de Lencquesaing.
CCF’s private-banking business, which includes subsidiaries in Monaco and Switzerland, continues to be profitable and sits at the centre of the bank’s strategy. This runs hand in hand with the asset-management department. At the end of 1997 CCF Capital Management had Ffr119 billion of assets under management. CCF also has a niche presence in investment banking, where it specializes in M&A, privatization advisory and distribution of equities and equity derivatives.
Its small size prevents CCF from offering a full range of capital-markets products, and analysts think it will need to build investment-banking partnerships in order to be a contender in the increasingly competitive Emu market. CCF is trying to increase its presence through acquisitions. In 1997 it increased its share of the UK’s Charterhouse to 50%. But in the same year CCF failed in its attempt to buy French bank CIC from the government (it was eventually sold to Crédit Mutuel). This disappointment led CCF to reaffirm its commitment to a small-scale, specialist domestic strategy.
This may not have the chance to be tested. Since the beginning of the year speculation has heightened about whether CCF will survive the growing wave of French banking consolidation. The bank’s healthy results have long made it an option for larger French and foreign banks looking for a medium-size acquisition. But the announcement of the planned merger of Société Générale and Paribas has acted as a catalyst in the long-stagnant banking sector. CCF looks increasingly like a target.
Swiss Life, Santander and ING are among the CCF shareholders that have recently increased their stake in the bank. In December 1998 ING doubled its interest to more than 5% (a move that caused CCF shares to jump more than 10% in two days), and seems to be CCF’s keenest suitor. Such a takeover could well kick-start a trend towards cross-border consolidation in euroland, something that has so far been notable by its absence.
A possible barrier to a deal, however, could be the high price that CCF would command. “We have no power over the market,” says de Lencquesaing. “We can’t anticipate what will happen. But the more successful we are, the more expensive we become.” He estimates that the bank is worth over Ffr40 billion – around two-and-a-half times net assets. “This is a lot of money for a small bank,” says de Lencquesaing. CCF hopes that this will be enough to maintain its independence in 1999.
Some analysts believe the bank could yet be broken up rather than sold to a single bank. ING, for example, might be most interested in taking over the investment-banking business. Along with the fate of Crédit Lyonnais and the deal between Société Générale and Paribas, the future of CCF is likely to be one of the most talked-about issues in French banking in 1999. Rebecca Bream
Leonia
Combining a local distribution network with other banks’ products is one way to add value in the new eurozone. Leonia wants to be the Nordic region’s middleman
The Leonia group makes up the third major force in Finnish banking after Merita and Okobank, with just under 20% of the country’s bank deposits. At the end of 1997 the government banking groups Postipankki and Finnish Export Credit were renamed as Leonia Bank and Leonia Corporate Bank respectively, and combined to focus on core businesses and cut costs by eliminating overlaps.
Leonia Bank now offers a full range of financial services for corporate and retail customers, including its traditional services through the post-office network. Leonia Corporate Bank caters for larger Finnish corporates and provides project and trade financing. “The government decided to join the forces of Postipankki and Finnish Export Credit to create a new, stronger financial institution,” says Harri Hollmen, president and CEO of the Leonia group. “After one year we are quite pleased.”
Hollmen also thinks that smaller euroland banks can carve a niche for themselves in the midst of bulge-bracket consolidation. “Small banks will survive and do well if they concentrate on a clearly defined client base,” he says. “When you go cross-border, you multiply your cost base and it becomes a whole different ball game. As long as you accept that you are small and stick to your client base you will survive.”
Differences between countries still exist after Emu, Hollmen points out, and Leonia can cater for the particular needs of Finnish clients. “There are two alternatives for banking strategy after Emu: become a specialist or aim for a pan-European scale,” he says. “We want to specialize on Finland and Finnish clients.” Over the past year Leonia has simplified its product range and cut costs by concentrating on the products that produce good results – any examples of profitability. These include retail services such as mortgages, deposit-taking, asset management and services for small and medium-size corporates. Hollmen thinks that one of Leonia’s advantages is that it offers corporates attention they may not get from bigger banks. “They don’t like it when a bank only calls them once a month,” he says. “Our competitive edge is being close to the client.”
Leonia is focusing on being a distributor of banking products rather than producing them all itself. “This strategy is feasible within Emu because the euro standardizes financial products,” says Hollmen. “Leonia is the middleman. This is a growing trend. Only the biggest customers can deal directly with the market, and banks still have a role as an intermediary.” Until investors have adequate credit-analysis skills they will still need the banks as advisers, and disintermediation is unlikely to affect the buy side in Europe.
Rather than the accepted idea that bulge-bracket banks will invade previously isolated euroland markets, Hollmen thinks that different banking groups will increasingly work together. “The big banks operating in the centre of the Emu market will be the producers of financial products, and we will cooperate with these producers. Some big banks will develop a physical presence in all euroland countries. But most will distribute services without consolidation, working with local specialist banks,” he says. Hollmen believes that Europe will develop along the lines of the US, with a few big players plus local specialists.
Leonia has also focused on developing its technology and new banking products. Telephone banking has grown rapidly, and 20% of Leonia staff no longer meet the customers face to face but service them over the telephone. “The branch network is still vital for asset management, but in the branches are becoming more like sales offices,” says Hollmen. The new branches that Leonia has opened since 1997 are only for the sale of mutual funds and asset-management business.
Leonia has only 62 branches, a very low number compared with its peers, because it also distributes its retail products through Finland’s post offices. This arrangement will be reassessed in 2000 and if other retail channels such as supermarkets seem more cost-effective then new outlets will be found. “The link with the post offices is purely commercial,” says Hollmen. “There is a transition from banks’ own branches to utilizing other retail chains. This is particularly good for countries with a large geographical area but small population.”
The big changes in Leonia’s banking strategy and the end of the old Postipankki era coincided with an influx of new managers in December 1997 who wanted to modernize the bank and make it a more viable commercial proposition. At least 50 of these key executives, including CEO Hollmen, came from Merita. It is clear that they disagreed with Merita’s shot at pan-Nordic status in the link-up with Nordbanken, which had just been announced. The move to Leonia has allowed Hollmen and his team to continue their country focus. “The clear distinction is that some banks have a regional concept, while we believe in a specialist concept,” he says. “I don’t think in the Europe of tomorrow that there will be Scandinavians and Europeans. There will be Finns and Europeans.”
Hollmen does not want to follow most of his Nordic peers by pursuing new business in the Baltic states, Poland and northern Germany. “Everyone is moving in the same direction, but is there room for all of them?” he asks. “The Baltic Sea strategy is getting a bit crowded.” Leonia is aiming for domestic growth, to increase its 1 million account holders and steal business from its domestic rivals.
For all the talk of strategy, the issue that will most radically affect Leonia Bank’s future is its privatization, likely to happen towards the end of the year. In January Finnish prime minister Paavo Lipponen stated: “Leonia needs domestic or foreign cooperation and this could mean selling part of it.” The timing of the sell-off and its method – whether though an IPO or a trade sale – is currently unclear. “The government will decide,” says Hollmen. He is confident that the bank will survive intact as it offers lean management and shareholder value to rival any of its privately owned competitors. Leonia’s monopoly on some of the state’s transactions will also be ended.
Feelings about foreign ownership of Finnish business are running high since the sale of a stake in the Pohjola insurance company by Merita to Skandia Insurance of Sweden. Several foreign and domestic banks will be interested in taking control of Leonia. But the new government formed after March’s election is a broad coalition and there are doubts about how quickly the process will now move ahead. Rebecca Bream
Okobank
Domestic clients not foreign are Okobank’s focus and retail business will drive its growth. Electronic banking and asset management are its buzzwords
The Okobank group was established in 1902 and has 31% of Finnish deposits, making it Finland’s second-largest bank after Merita (the product of the merger of two banks, Unitas and KOP, and the largest Finnish bank by far with around 40% of all deposits). Roughly 2 million of Finland’s population of 5 million bank with the Okobank group.
The group consists of 246 local cooperative retail banks, a central coordinating body and Okobank, and a commercial bank which has been listed on the Helsinki stock exchange since 1989. It is 60% owned by the central body with 24,000 other shareholders. Okobank specializes in corporate and investment banking and provides technological, product and capital markets services to its network of member banks. The structure of the group is similar to that of Rabobank in the Netherlands, and the different parts are regarded as one whole for credit-risk purposes.
Okobank’s strategy is to continue to concentrate on its home retail and commercial markets rather than to pursue over-ambitious expansion. “We are very much domestic-client-oriented, we have no aspiration to try to acquire new clients in Germany, France or even in the Baltics,” says Mikael Silvennoinen, the president of Okobank. “We have restricted ourselves to servicing the Finnish people and corporates.”
Okobank’s branches in Sweden, Estonia and Russia were established to service Finnish businesses there. “Our strength is that we know Finland pretty well,” says Silvennoinen. “And we can be successful when we stick to our strengths.” Trying to grow outside its home market would entail finding a merger partner, which might mean Okobank having to compromise its cooperative structure.
Instead, for the last 20 years Okobank has been involved in the Unico alliance, a group of 11 European banks with a cooperative background, including Rabobank of the Netherlands, Crédit Agricole of France, DG Bank in Germany, ICCREA in Italy and Föreningssparbanken in Sweden. Silvennoinen is excited about the ways the Unico project has been accelerating in the last few years. “The euro has given us opportunities to boost the Unico cooperation,” he says. A cash management project called Unicash facilitates transactions in euroland between the banks, and a PC banking service (which also includes Lloyds TSB of the UK) has been set up.
Unico has also given Okobank something of an entry into bond underwriting. The members of Unico banking group between them lead-managed 127 euro and Ecu-denominated debt issues during 1996 and 1997. For many deals, the cooperative bank in the country of the issuer lead-manages the deal and other Unico banks take the role of co-leads, ensuring that the paper gets well distributed across Europe. “This kind of cooperation gives Okobank the opportunity to be strong in placing securities outside Finland,” says Silvennoinen.
The Unico alliance has already helped Okobank achieve growth in the bond markets, and the alliance is working on an expansion into new equity issues this year. Okobank’s capacity in equities will be helped by the alliance between the Helsinki stock exchange and the Frankfurt and London exchanges.
Okobank is a pioneer of the technological revolution sweeping away the old notions of the branch network in retail banking. It was the first bank to offer banking services by mobile phone, and a quarter of its customers use the internet for banking. Almost three-quarters of all transactions are now done electronically, with internet banking being the most rapidly growing channel.
Despite these trends, Okobank does not want to reduce its network which is spread throughout the country. “We are not going to rationalize the number of branches but the inside of branches will change,” says Silvennoinen, suggesting that branches will become centres for sales of financial products and electronic banking, staffed by a smaller team of advisers. “The definition of branches is changing,” he says. As in all Finnish banks, the number of staff employed has dropped steadily during the 1990s, through retirement and through the widespread redundancies.
Since listing on the Helsinki stock exchange Okobank has attracted considerable foreign investment, mainly from UK and Swedish funds, bringing a new focus on shareholder value. “It has forced us to clearly communicate our structure and be more transparent,” says Silvennoinen. Book-keeping and risk-management throughout the group are becoming more centralized in the Okobank central body. Profitability has improved every year since the start of the decade.
Silvennoinen feels confident that Emu will provide added business opportunities for Okobank, to counter the extra pressures that smaller euroland banks will come under. “We have to change our role in the capital markets. We were a market-maker for Finnish markka, but we are too small for this role in the euro,” he says. Okobank is currently focusing on expanding its asset-management business, based on a partnership with Flemings established in 1989. And as more Finnish corporates turn to the capital markets for financing, Okobank aims to be their first choice of underwriter and arranger. “We want to be able to give international services to our domestic corporate clients,” he says. Rebecca Bream
SGZ-Bank
The old business of providing central services to local cooperative banks is dying. SGZ’s answer: become a high-tech product innovator
Most non-German bankers – not to mention their clients – have never heard of SGZ-Bank. Up to now, they probably didn’t need to. SGZ (Südwestdeutsche Genossenschafts-Zentralbank) is a relatively large institution, with assets of some $40 billion. But like so many European banks, it has a semi-captive core market that traditionally made it a dull prospect for potential competitors or partners.
A wholesale bank and liquidity manager for several hundred tiny cooperative banks between Frankfurt and the French border, SGZ traditionally handles the work the local cooperative banks cannot do, plus any business discarded as unprofitable by larger and more internationally oriented banks. It is an awkward niche.
Now that the single currency has arrived, SGZ-Bank may start getting interesting. Borderless markets cannot begin quickly enough for it. It has learnt a thing or two from its Frankfurt neighbour Deutsche Börse which has reinvented itself as a systems house. Likewise SGZ is now trying to position itself as a savvy hi-tech factory and as a fee-earner rather than a traditional lender living on interest margins.
Dietrich Voigtländer, a member of SGZ’s five-man management board, is candid about how SGZ is slowly losing its traditional business. Most of the local cooperative banks in Germany are still too small to operate efficiently and hundreds of mergers take place every year. These tend to follow a similar pattern. Banks with surplus liquidity join up with those with too little liquidity, depriving the wholesale bank of both kinds of treasury management business, Voigtländer says.
Programme lending scarcely pays any more and payments might well be handled more efficiently in future by non-banks and near-banks, Voigtländer argues. And with the launch of the euro, the local cooperative banks – and, in turn, SGZ – have lost fees from dealing in notes and coins. That was far more significant a business than forex trading. “The larger the share earned by intermediaries, the more inefficient the market,” he says.
One solution might have been for SGZ to get involved in a merger too. That, however, is precisely what the bank has been resisting throughout the 1990s. Its boss, Ulrich Brixner, cancelled a planned merger with DG Bank at the 11th hour back in 1991 and has ever since been thumbing his nose at his larger, more international cooperative cousin. Brixner resents DG Bank for punching at a higher weight and emphasizing its superior expertise in capital markets and investment banking. In order to remain independent, SGZ has worked furiously to create a new identity.
Voigtländer is convinced that product innovations represent the most promising future for wholesale banks like SGZ. His main new product is Xios, a securities order-routing system based on Deutsche Börse’s Xetra electronic trading system. He hopes it will become the standard for all German cooperative banks by the end of 1999.
Real-time processing is already possible for banks with a direct stock exchange link, and near-time settlement will become standard, even for retail transactions, Voigtländer says. “Now that Xetra 3 [the new generation of the trading system] is launched we want to have our order-routing system with same-day settlement on the market,” Voigtländer says.
“I have been here for 16 years and have a pretty good idea of how long it takes to convince people. Personally I have been disappointed by how slowly electronic distribution of securities has caught on. But if we can convince one bank, we acquire 30,000 customers at a stroke. That’s what happened with Badische Beamtenbank [a largish cooperative bank in Karlsruhe, Germany]”. Last year SGZ set up a new bank to handle securities for the entire cooperative network in Germany; gradually the other main cooperative banks are joining.
With Xios the local cooperative banks could save substantial internal costs, he argues. “For us it will pay back in 3.7 years with break-even after 3.3 years.” Within two years, securities clearing and settlement will be standardized within Europe, Voigtländer believes. When that happens, SGZ will be able to test the strength of its affiliations with its cooperative banking partners – including Dutch bank Rabobank and French bank Crédit Agricole – by offering them Xios preferentially.
Likewise SG-Systems, the bank’s payments-processing system, is being offered to other banks. SGZ aims to become the German market leader in that business and claims already to have 25% of all professional securities accounts in Germany, including business from Citibank and about 100 other banks.
Theoretically, products like these put SGZ in a position to find a European market at last. But it will be several years before Europe has a truly single market in processing, Voigtländer believes. “Settlement is done daily in Germany, every seven days in France, but just once a month in Portugal,” he says.
Meanwhile, SGZ hopes to gain business from local banks to compensate for the lost opportunities. The level of payments processing at local cooperative banks is shrinking, so they are back-sourcing to SGZ and outside companies. In turn it makes sense for SGZ to save money by outsourcing certain functions: SGZ has not employed a computer programmer for the past 10 years.
Innovations like these are quickly imitated. The window of opportunity lasts perhaps 12 to 18 months, then closes very quickly, says Voigtländer. “The life of a product is getting shorter all the time and we have to be quicker all the time. You can’t expect a product to last three, four, five years any more.”
It is a challenging strategy, requiring major investment and timely launches. Luckily for SGZ, it can still fall back on traditional borrowing, lending and treasury for its main revenues. Laura Covill
