In the post-Covid era of accelerated banking sector digitalization, publicly owned savings and cooperative banks seem to be the ultimate throwbacks to the nineteenth century, when most of them were founded.
Local management – and, by extension, a deeply branch-based model of banking – is fundamental to both sorts of lender. That makes them seem diametrically opposed to the fast-growing and often international cloud-based neobanks of the twenty-first century.
But neobanks remain minnows in terms of lending. Cooperative banks have steadily increased their share of retail lending across Europe in the last decade. They are especially dominant in France, where the biggest is Crédit Agricole. In Germany, they compete for dominance with publicly owned local savings banks, the Sparkasse, which show little sign of any diminution of their power.
Cooperative banks have steadily increased their share of retail lending across Europe in the last decade
There’s a similar situation in countries such as Switzerland and the Netherlands, where mutually owned Rabobank is the country’s biggest retail bank.
Since 2008, these kinds of banks have often found it easier to cope with regulatory demands for more capital – as they are under less pressure to pay out dividends. And their natural orientation to local retail and commercial banking has also chimed with tighter regulation of international and investment banks in the years since the crisis.
More recently, cooperative and savings banks have faced a less immediate existential crisis from the impact of low and negative rates on their financial returns, too.
Returns
Chris Flowers, of financials private equity firm JC Flowers, has much experience investing in retail banks in northern Europe, including previously publicly owned and cooperative banks. He thinks the natural reaction to negative rates by mid-tier listed or private equity-owned banks is to shrink, and then return capital or merge with similarly minded lenders – the latter being effectively another means of taking out capacity.
One example that Flowers knows well is Hamburg Commercial Bank, formerly a publicly owned German Landesbank. JC Flowers and fellow private equity company Cerberus bought Hamburg Commercial, then known as HSH Nordbank, in 2018. In 2020, the bank reduced its balance sheet by a third, giving it a capital ratio of 27%, which it will now use either to return capital or do mergers.
“For us, if the most we can make on our equity is 3% to 5%, we’re going to try to shrink that [balance sheet] down, and free up capital and eventually get it out, or merge,” Flowers tells me in a podcast interview.
Such a radical transformation would be harder at a larger listed bank. When former Commerzbank CEO Martin Zielke tried last year to give up earning more than a 4% return on equity (ROE), it cost him his job – mainly due to pressure from Cerberus, its joint biggest private shareholder. Such a low ROE would be less than half the standard estimate of a bank’s cost of equity.
The reality, though, is that the only bits of European banking earning their cost of equity are those that are either not European or not banks. Insurance and asset management, for example, are subject to lower capital requirements. Or take Banco Santander: its underlying ROE last year in Brazil was almost five times higher than it was in Spain and the UK, where it owns an amalgamation of former building societies.
As Flowers points out, investing in banks with low returns only works if the shares are heavily discounted. This has been Santander’s problem in the UK more than Spain, due to the different prices it paid for the banks in those countries.
The only bits of European banking earning their cost of equity are those that are either not European or not banks
European retail banks that remain mutually owned, however, suffer far less angst.
In many cooperatives, there remains a sense that it was neglect of mutual values that led to their problems in 2008. Crédit Agricole has arguably done relatively well lately, because the cooperative element of its governance regained power in the group a decade ago, forcing it to steer clear of more glamorous but riskier bits of finance. Natixis, by contrast, has done badly because it continued to bet more on derivatives and high-end asset management.
But now Natixis is delisting, becoming 100%-owned by French mutual group BPCE. It will have less freedom and less need to try to boost its returns in businesses that have no relevance to BPCE’s wider clientele.
“The cooperative movement is getting stronger and more relevant as the interest of cooperatives is in the members not the shareholders,” says Berry Marttin, a Rabobank executive and president of the European Association of Cooperative Banks. “It’s not about the maximization of profit but making enough profit to exist for the longer term.”
Nevertheless, especially in the post-Covid era, the question remains of how well these networks of local banks can compete, in decades to come, with banks that are more centralized. That question is especially valid in retail, which will continue to need local branches to a greater extent than commercial banking.
The case of Lloyds Banking Group, the UK’s biggest retail bank, is informative. Although its main brand is an ex-building society, Halifax, outgoing chief executive António Horta-Osório boosted Lloyds’ efficiency much more than other CEOs did. It paid more than £12 billion in dividends between 2014 and 2020. But Lloyds has also led the charge in digital banking – putting it well ahead of any mutual bank in the UK and probably Europe in areas such as cloud technology.
