Non-Eurozone Europe
Greece
Best bank: Alpha Credit Bank
Best foreign bank: Citigroup
Best securities firm: Sigma Securities
Best foreign securities firm: Warburg Dillon Read
Although the Greek banking sector is still heavily dominated by the state-owned National Bank of Greece, over the past 12 months consolidation of the more fragmented end of the market has started in earnest.
National Bank has had a good year in which it reaped the rewards of initial restructuring, including rationalization of core banking businesses and the streamlining of banking processes. However, private-sector banks are beginning to catch up in terms of market share.
Early last month Eurobank, Greece’s third-biggest privately owned bank, announced the launch of a hostile takeover bid for Ergobank, the second-biggest private bank. Eurobank, which is owned by the Latsis family and has a partnership with Deutsche Bank, has been buying shares in Ergobank since the beginning of the year, and now owns just over 20% of its rival. It is expected to bid for a controlling stake before the end of the summer. Ergobank has announced that it will fight the bid but many analysts expect Eurobank to achieve its aim.
Acquisition strategy
Eurobank has already established a strategy of rapid growth through acquisition with the purchase of Bank of Athens and Bank of Crete during the past 12 months. If the bid for Ergobank is successful, Eurobank will have a market share approaching that of Alpha Credit Bank, the leading privately owned bank in Greece and Euromoney‘s choice as the country’s best bank. Perhaps next year Eurobank will pose a serious challenge to Alpha Credit for this award.
Alpha Credit Bank has also played a big part in consolidation through its purchase in March of a 51% stake in Ionian Bank from the Greek government for Dr272 billion ($857 million).
The acquisition is crucial to Alpha Credit’s growth ambitions and gives it a market share of almost 20% of commercial-banking assets. This is big enough to compete effectively with National Bank and fend off newer competitors such as Eurobank, but is still small in European terms. The bank realizes the need to
build itself up in order to compete when Greece enters the eurozone, probably in 2001, and is likely to pursue further acquisitions later this year.
With the purchase of Ionian, Alpha Credit is expecting to be able to sell its products to a wider client base and also improve the productivity of the less efficient Ionian. Cost synergies through redundancies are not easily come by in the protectionist Greek environment, so it is fortunate that there is not much branch overlap.
Downgrade
However, Alpha Credit’s short-term profitability and asset quality will fall as it absorbs Ionian, which is more traditionally bureaucratic than the forward-looking private bank, and has a contrasting corporate culture. Alpha Credit will also have to take on Ionian’s large portfolio of non-performing loans.
To reflect the problems these could raise, Fitch IBCA has downgraded Alpha Credit’s individual rating from B to B/C, predicting that management resources might be stretched. But the market expects Alpha Credit to deal with these difficulties, and the purchase has been seen as a big advance for Alpha Credit’s long-term strategy. The bank successfully issued $100 million of equity in May to pay for the acquisition, and next year it intends to purchase the remaining 49% of Ionian through a share exchange.
Market confidence in Alpha Credit Bank stems from its dynamic management style, effective customer service and innovative products, including internet banking. Pre-tax profits rose by 31% to Dr126 billion in the first quarter of 1999, compared with the same period in 1998, and the bank’s assets and deposits also grew substantially.
In the nine years since its establishment, Sigma Securities has managed to set the pace in the burgeoning but fragmented Greek securities market. The first privately owned securities house to become a member of the Athens Stock Exchange, Sigma has a near 10% market share of debt and equity trading. Market share of sales to foreign retail and institutional investors is 20%.
Alpha Securities and National Bank’s securities arm have the edge in sales volume to domestic investors but Sigma has consistently beaten its rivals on profits. In 1998, Sigma’s net income before tax rose to approximately Dr3 billion compared with Dr1.7 billion in 1997.
Sigma’s success is based on the breadth of its activities and services. As well as brokerage, it is strong on the underwriting of deals, advisory services and producing equity and credit research. Sigma’s strategic alliance with Bank of Pireus, established early in 1998 when the bank bought a 51% stake in Sigma, has expanded its financial and operational base and is working well.
Foreign niches
Citigroup is the biggest foreign bank in the Greek market, with 32 branches employing 1,200 staff. As well as retail and private banking, Citigroup provides corporate-finance services and is a major player in the forex market, as well as being one of only nine primary dealers for Greek government bonds. No other foreign bank has been in the Greek market for so long (since 1964) and covers such a wide range of services.
Although local securities houses dominate the capital markets in Greece, Warburg Dillon Read has succeeded in carving out a niche in brokerage as well as establishing an impressive track record of primary-market deals.
During 1998, WDR executed four of the five fully marketed international equity offerings that came out of Greece. This included the $695 million IPO of mobile-phone operator Panafon in December 1998. This offering was the largest-ever private-sector IPO in Greece.
Another strength in the equity market is the high quality of WDR’s equity research, with regular coverage of the top-20 Greek stocks.
Switzerland
Best bank: UBS
Best foreign bank: Deutsche Bank
Best securities firm: Warburg Dillon Read
In the 12 months since the official marriage of UBS and SBC the new group has shaken off its early problems and begun to live up to expectations. UBS, as the merged entity is known, has taken its place among the world’s leading financial services groups with total assets of $684.5 billion at the end of 1998. In terms of size, it has now edged ahead of Credit Suisse, the other major player in the Swiss banking market.
The second half of 1998 was marred by heavy losses resulting from the Russian crisis and UBS’s involvement with LTCM. But 1999 has so far been more fruitful. In the first six months there was strong revenue growth and slightly lower operating costs; net profits in the first quarter of 1999 were up 21% on the previous year. The follies of the old UBS have been stamped out by SBC’s more forward-looking business practices, and although this bloodletting was painful it is beginning to reap rewards.
UBS has been the fastest-ever financial merger on such a large scale. Outside Switzerland, integration is completed, and in the domestic market the banks’ IT systems will be merged by the end of the summer and the two branch networks will be combined by the end of the year. CEO Marcel Ospel claims that the merger costs have now largely been digested.
Strategically, UBS has identified areas of potential growth and will continue to play the role of a universal bank. In the domestic market, it has endeavoured to increase its stake in private and corporate banking, using these businesses as a platform for international expansion over the medium term. During 1998 and the first half of 1999, UBS expanded its private-banking activities in Australia, Germany, Italy, Japan, Spain and most recently France. Private banking is one of the most profitable parts of the group, with profits from this business rising by 37% in 1998.
Post-merger cost-cutting has been intensive. UBS has already cut 7,000 jobs worldwide as a result of the merger and plans to reduce the remaining international workforce of 48,000 by a further 8,000 over the next four years. Just over half of these jobs will be shed in Switzerland.
Share buy-backs
UBS’s return on equity, as with the rest of the Swiss banking sector, was somewhat mediocre in 1998 at 10.3%. The bank is keen to improve this situation and has set a target for ROE of between 15% and 20% by 2002. One of the ways in which UBS is trying to increase shareholder value is through its scheme of share buy-backs, announced in March this year. UBS has bought 2% of its own shares since this announcement, and plans another purchase of 1% in the next few months. To make better use of its balance sheet, UBS will continue to invest in its own stocks any capital in excess of its target of 8.5% to 9% for
tier one.
Warburg Dillon Read, a business that has contributed a large proportion of the profits this year for its parent UBS, is again the best securities house in Switzerland. On June 1 WDR opened the largest trading floor in Switzerland (and continental Europe) in its offices in Zürich, combining four separate floors. This will be the main link to the firm’s other trading centres in the UK, US and Asia.
In the first quarter of 1999 higher earnings have been reported in WDR’s client-driven core businesses. Since the merger of the two banks’ securities businesses, WDR has built up revenue-generating capacity but has also cut overlaps and now uses 25% less staff. The global distribution and trading of European equities and equity derivative products have performed particularly well.
Deutsche Bank, whose Swiss operations are based in Geneva and which has branches in Zürich and Lugano, is a long-established player in the Swiss market. It has been operating at most levels in Switzerland since the early 1980s, and now focuses on private banking and asset management. As well as engaging in retail banking, Deutsche is a leading house for the underwriting of debt and equity in the Swiss domestic market, and has managed to capture a share of the market in securities trading. Rebecca Bream
Turkey
Best bank: Garanti Bank
Best securities firm: TSKB
Highly commended: Garanti Securities
Best foreign bank: Chase
Garanti‘s performance in the last 12 months has been impressive. In terms of assets, market share has increased from 6.5% to 8.9% in the past 12 months. In terms of profitability, the operating margin increased from 66% in 1997 to 69% in 1998. Profitability per employee is $110,000, up from just $15,000 nine years ago, and return on equity is 36%.
In terms of asset quality, non-performing loans (NPLs) stand at 1.3% of total loans compared to a 7.2% average in the Turkish banking sector. And Garanti maintains a strict provisioning policy in which loan-loss reserves are 100% of NPLs. The bank’s BIS ratio is 16% versus the 8% minimum. The bank is now the third-largest listed Turkish bank in term of balance-sheet size.
Alo alo
The bank is also at the forefront of offering new and innovative products to its customers – products which at the same time help to increase the bank’s profitability by creating new distribution channels for its services. For example, the bank is one of the fastest-growing providers of credit cards; it has 66,500 customers for its telephone banking business Alo Garanti; it has a thriving internet banking business with 56,000 customers and seven million hits are recorded on the bank’s internet site a month.
The challenge for the coming year will be falling net interest income as spreads on investments in government securities fall as interest rates come down. All Turkish banks will then have to refocus on lending business and on non-interest income-generating activities. Garanti has shown itself ready to meet these challenges.
Choosing the best securities house in Turkey has been complicated by the recent restructuring of the financial operations of the Dogus Group. In May 1999 the group decided to merge all the capital market activities of its subsidiary banks – Garanti, Ottoman and Korfezbank – under the aegis of Garanti Securities. This creates a group with distribution through 322 branches, eight investment centres, an investment fund and eight mutual funds. It also creates an entity with a market share of IPOs in excess of that of this year’s award winner TSKB.
However, as the awards cover the 12 months prior to June 1999, this new entity could not be considered for this year’s award. Aside from Garanti, the two leading securities firms in Turkey are TSKB and Global Securities. These firms have similar market shares and are both strong research houses.
However, Global’s influence has waned in the last year, partly as a result of the effect of the Russian crisis on the Caucasus region, where Global had invested heavily. Last year TSKB, which is a consortium bank, suffered poaching raids on its staff from rival institutions. Thanks to then executive vice-president Metin Ar, the operation continued to prosper. However, Ar has himself now moved to TSKB’s toughest competition – the newly strengthened Garanti Securities.
The two most prominent foreign banks in country are Chase and Citibank. As elsewhere the two banks’ businesses differ. Chase focuses on cross-border, wholesale transactions while Citi also has a domestic banking business (Chase does have a private-banking operation). This year, the volume and range of transactions for international and domestic companies executed by Chase make it easy to nominate best foreign bank in Turkey.
Chase is the leading project-finance institution in the water and power sectors. It has arranged several project financings including a $150 million facility for the Dogus Group and a $75 million facility for the Bayindir Group. The bank is lead advisor to the government on the privatization of refining company Tupras and gasoline distribution company POAS and is a key relationship capital-markets house for the Republic.
It joint lead-managed Turkey’s recent 10-put-five $200 million global and reopened the deal by $200 million as well as being instrumental in the country’s $2 billion shelf registration with the SEC and the Republic’s $3 billion EMTN programme.
Chase is also a key capital raiser for Turkey’s major banks both through securitizations and vanilla bond issues, as well as achieving the highest volume in OTC bond trading in 1998 among the foreign banks (second overall). The bank is also the highest-rated foreign bank in foreign exchange in Turkey according to the Reuters-TLFX survey and the largest custodian in the country. Simon Brady
United Kingdom
Best bank: Lloyds TSB
Best foreign bank: Citigroup
Best securities firm: Warburg Dillon Read
In the absence of significant players in global investment banking, UK banks have become world leaders in the retail sector. They are embracing new, low-cost channels for distributing products and services, and the role and size of branch networks have already changed substantially.
Back-office procedures have largely been
centralized, and since 1990 branch numbers have fallen by 26%.
Lloyds TSB is a prime example of UK banks’ drive for efficiency and success in creating shareholder value. It earned £3.29 billion ($5.2 billion) before tax in 1998 and delivered 32.9% return on equity in 1998, almost 10% more than the next best performer, Royal Bank of Scotland. Since Lloyds’ merger with TSB in 1995, it has been able to make cost savings estimated at £400 million a year by 1999. Its falling cost base is unique in the UK sector and gives the group a real advantage over competitors.
One name
Rationalization of the Lloyds and TSB branch networks has begun but two separate brand names are being retained for a short time. Eventually the brands will be fully combined, and the launch of Lloyds TSB as a retail-banking name is expected before the end of the year. Up to 700 overlapping branches will have been cut by the end of the merger process, adding an extra £300 million of savings.
After all the changes have taken effect, Lloyds TSB will still have the UK’s largest branch network. However, direct-banking services are also well advanced – 7% of the group’s customers already bank by telephone and internet banking is growing rapidly.
Since the merger with TSB and the acquisition of Cheltenham & Gloucester in 1995, the group has significantly improved its risk profile through a greater exposure to low-risk mortgages and a smaller portfolio of high-risk loans. Mortgages now account for 53% of the lending book compared with 20% in 1989.
For some time the market has been keen for Lloyds TSB to kick-start the next round of UK bank consolidation, and the bank’s shares had been underperforming since the beginning of the year as a result of speculation about its plans. However, at the end of last month Lloyds TSB announced that it would buy mutual life assurance and pensions company Scottish Widows for £7 billion.
The deal will give access to the high-profile Scottish Widows brand and a wider customer base, as well as new strengths in the burgeoning pension and asset-management markets. The merged institution will have more than £80 billion of funds under management. Lloyds TSB’s strategy to broaden its business lines is reminiscent of Citicorp’s merger with the Travelers group in the US last year, and illustrates the blurring of the boundaries between banking, insurance and asset management.
Citigroup, once again the UK’s best foreign bank, has had a branch in London since 1902. It shows no signs of letting go of its leading positions in UK private banking and global consumer banking. In corporate banking it serves 98% of the FTSE 100 companies through its 13 dedicated sector groups, and is the biggest foreign arranger of loans to UK corporates. Citibank is also a major provider of credit and charge cards, including the UK Diners Club card business.
Citibank’s business formula has worked well in the UK but changes are on the horizon. The bank’s merger with Salomon Smith Barney has led to a pledge to move all London-based investment-banking and corporate-banking divisions during 2000 to a new building in Canary Wharf on the eastern fringes of the City, a project that is the UK’s largest office-building development. The retail-banking businesses will remain in the West End.
Third-time winner
Warburg Dillon Read has also defended its title this year, and is the best securities house in the UK for the third year running. Over the past 12 months it has been showered with plaudits including top ranking in Euromoney‘s Poll of Polls for underwriting, trading and advisory services in the securities markets, and a best UK sector research award from Institutional Investor.
WDR has captured an impressive share of the UK securities market – it has acted as underwriter on 13% of UK debt and equity deals over the past 12 months. In UK equities, WDR was the lead manager for the largest convertible-bond issue to come to market since the start of 1998, a €578 million ($592 million) deal for rail-infrastructure provider Railtrack. In the debt markets WDR acted as bookrunner for UK deals including electricity generator Scottish Power’s Dm725 million ($380 million) issue in July 1998 and construction materials group Aggregate Industries’ £110 million deal in April this year. RB
