It’s not meant to be like this. In the new digital world, banks are supposed to be financial supermarkets, developing internationally transportable distribution platforms with high-value third-party products. Even loans and deposits – certainly insurance and savings products – should be outsourced in this model.
Ten years ago, Allianz’s sale of Dresdner to Commerzbank, together with ING’s carve-out of NN – both triggered by the 2008 crisis – were supposed to have heralded the death of bancassurance. But that has not come to pass.
Today, as higher capital requirements and negative rates have become longer-term features of the financial landscape, ownership of in-house factories for insurance and asset management products is a rare saving grace for many continental European banks.
No wonder banks resist selling. ING was forced to exit NN as a requirement of its 2008 bailout. Yet for others, even capital shortages may not be enough to persuade them to follow suit, as some Spanish banks (notably Banco Sabadell) might demonstrate today.
It’s a similar story in all of the main continental European states. Banks that own insurers and asset managers with big domestic market shares are performing much better than many of their peers. Think of France’s Crédit Agricole; Germany’s cooperative and central savings bank groups; Belgium’s KBC; and Spain’s CaixaBank, whose origins lie in insurance.
Others are struggling largely because their ownership of such factories is either non-existent or small, which exacerbates their reliance on mortgage interest margins or uncompetitive corporate and investment banks. This includes Societe Generale, which sold its asset management arm in the early 2010s; Commerzbank; ING, in the Benelux region; and Bankia in Spain.
The trend is increasingly clear in Italy, too. As in other European countries, banks are big distributors of life insurance and mutual funds. However, often to pay for writing down loans to distressed local enterprises, many Italian banks have had to sell the product factories, and now enjoy a much lower share of the associated fees as a result.
UniCredit and Banco BPM, which are the second and third biggest domestic banks in Italy, sold in-house producers in the latter part of the last decade. Intesa Sanpaolo, Italy’s biggest domestic bank, did not. It owns the second biggest life insurer in Italy and still owns its asset manager, Eurizon. Largely as a result, its returns are far higher.
As chief executive Carlo Messina told Euromoney late last year: “It's a strength of Intesa Sanpaolo to have the product factories in asset management and insurance. Unless you’re in such a difficult situation that you need to make a disposal to raise capital, it’s much better to own the factory, rather than having long-term distribution agreements.”
That’s almost a direct contradiction to rival Jean Pierre Mustier, who has repeatedly defended the sale of UniCredit’s asset manager to Crédit Agricole’s Amundi in 2016, the year he became chief executive. While UniCredit also distributes certain third-party insurance products, it has signed up to a long-term distribution agreement with Amundi.
According to Mustier, he might have proposed selling UniCredit’s asset manager even had the bank not needed the capital so desperately, as the business lacked scale. This is a common niggle about bank-owned product factories in insurance, as well as asset management. In reality, though, such concerns alone rarely trigger divestments of life insurers and asset managers.
The importance of owning these products goes back to how retail banking has tended to work in continental Europe, especially in mortgages.
European mortgages are cheap and kept on balance sheet, partly because they are loss-leaders for other products. Borrowers effectively pay for the loan through fees for associated life insurance. This is especially true when interest rates are so low. Of course, it works better for banks that own the product outright.
Meanwhile, on the savings side – including some forms of life insurance, as well as asset management – owning the factories has also become a critical revenue-growth engine, as banks are seeking to pass on some of the costs of negative rates onto their depositors.
Will the factory owners’ advantages persist?
According to Mustier, as the European Union introduces greater constraints on domestic sovereign bond holdings, this will weigh more heavily on bank-owned insurers. Regulators have also been progressively eroding the privileges lenders previously enjoyed in insurance and asset management by making it easier for clients to shop around and avoid captive players altogether.
While new European regulation heightens transparency in the fund industry, mortgage offers are often still packaged with life insurance in the eurozone. Many borrowers do not know how easy it has become for them to switch to a cheaper insurer soon afterwards.
Now clients, aided by the internet, are starting to realise how much insurance and fund fees make up banks’ revenues – because they’re the ones paying for it. As more borrowers act on this ability to change providers, many banks have no better option than to play the same game with those that remain loyal, for as long as they can.