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Luqman Arnold |
Last year went out with a bang as far as financial M&A was concerned. After a relatively uneventful 12 months, HSBC swooped on Household, and Crédit Agricole announced that it was finally bidding for the rest of Crédit Lyonnais.
Could this be the beginning of the long-awaited wave of consolidation, even cross-border consolidation, in the banking sector? As many banks struggle to maintain capital ratios in the face of a market that has dive-bombed, it would be difficult to blame the richer among them – such as BNP Paribas, UniCredito Italiano and Lloyds TSB – thinking that now is a good time to team up with a cash-strapped rival.
France is a key market to watch. If Crédit Agricole gets the go-ahead from the French regulator to buy Crédit Lyonnais, the frustration of losing out could propel BNP’s chairman Michel Pébéreau into action. His target if Crédit Lyonnais were taken off the market might well be Société Générale but rumours have long swirled around a link-up between BNP and Fortis. The two held discussions last year and analysts say there’s probably some logic in a Franco-Belgian tie-up particularly in businesses such as wholesale banking, mortgages and credit cards.
Until BNP makes its move, though, Société Générale’s future is uncertain. “SocGen is paralysed,” says one banker. “If it raised its head now it would be gobbled up because BNP is the synergy player so it could pay more for it than a rival.” But if Pébéreau was otherwise occupied, SocGen would be free to make its own matches, possibly with Dexia or even ABN Amro.
Bankers aren’t exactly holding their breath for a domino effect of cross-border mergers though. “The deals we’ve seen so far have been all about timing,” says Terry Eccles, head of the FIG group at JPMorgan. So HSBC bought Household when it was going through a funding crisis and the Crédit Lyonnais situation was brought to a head because the government lost patience with Crédit Agricole.
That’s not to say there aren’t deals waiting to happen. At some point Commerzbank and Hypovereinsbank will get together and FIG bankers suspect that Luqman Arnold, CEO of Abbey National, is grooming the UK mortgage bank for a bid deal. But while advisers say the CEOs of all of Europe’s banks have been sounding each other out for some time, they’re not likely to do anything about it in a hurry. “In the absence of a precipitating event, deals that people might like to do will probably be pushed back until things look more certain,” says Eccles.
In part this is due to the risk aversion that has stymied the plans of potential bidders in other industries over the past 18 months but there are also specific downsides attached to acquiring a bank. “With the economic situation as it is, people just don’t know what’s in the loan portfolio,” says a FIG banker. They’ll want to do a lot of due diligence and if things still don’t add up will probably pull back rather than risk a nasty surprise.
Emphasis on selling
Not surprisingly, mandates for smaller divestitures feature much higher on bankers’ wish lists for 2003 than for full-blown acquisitions. “For a while, financial services firms will be more focused on shoring up their balance sheets,” says Herman Hintzen, head of CSFB’s European FIG group. That means the emphasis is on selling, not buying.
Meanwhile it’s far better to have a bank than an insurance company as a client. Whereas last year, FIG teams were devoting resources to possible cross-border deals between insurers, concerns about solvency ratios at all of them have put paid to that. Some of the UK insurers, such as Britannic and Friends Provident, are looking pretty distressed. Even the bigger continental European ones – Axa, Allianz and Generali – seem a bit shaky. The only business they are likely to be sending their banks’ way is rapid sales of non-core assets.
But are there any buyers today for financial services companies? It all depends on the types of businesses put on the block, says Hintzen. “Life insurance and asset management are not flavour of the month at the moment but custody, credit cards, consumer finance and fleet leasing are all experiencing a strong trend of consolidation.”
In the securities services area, for example, Deutsche Bank managed to sell out to State Street and Bank of New York bought CSFB’s Pershing unit, because these businesses benefit from scale. Commerzbank, however, got a frosty reception when it tried to sell asset manager Jupiter last year. That’s bad news for Italian bank Capitalia and Zurich Financial Services, both of which are hoping to sell fund managers this year.
Whatever divisions financial services companies are looking to sell, they need to be more realistic about the price they can hope to achieve. “Companies will have to take the price that is on the table,” says Stephen Howard, head of FIG corporate finance at Dresdner Kleinwort Wasserstein. “Last year a lot of people were in denial.” This year, there’s no escaping the fact that valuations have slumped.
Another potential source of deals is the growing trend in cooperation between banks and non-banks. “We’re working on a deal at the moment in which a retailer is working with a credit card company,” says the head of FIG M&A at a European bank. “I think that banks will increasingly make their product capabilities available to utility companies, retailers and other companies outside of financial services.”
Bankers seem confident this type of business will keep them busy. “We think that the FIG business is going to be pretty robust this year,” says Calvin Redlick, head of FIG at BNP Paribas. But few think that the HSBC Household and Crédit Agricole/Crédit Lyonnais deals are anything but the exceptions to the rule.
