A big, and rare, European bank merger

Jun 15th 2005
From The Economist Global Agenda

Does the €15 billion bid by Italy’s UniCredit for Germany’s HVB mean that the long-awaited wave of consolidations among European banks has begun? If so, bank customers would benefit. But such cross-border mergers still face daunting obstacles, not least protectionist attitudes by national regulators

FOR all the constant rumours of bids and mergers between European retail banks, there has been disappointingly little progress towards the creation of a single, continent-wide market in financial services analogous with the single market in goods that the European Union has enjoyed for the past 13 years. So far, most of the mooted cross-border banking tie-ups have faltered in their early stages. However, on Sunday June 12th, Italy’s UniCredit announced that it was going ahead with its heavily trailed bid for HVB, Germany’s second-largest banking group, which if completed will be Europe’s biggest cross-border bank merger to date.

UniCredit (known until recently as UniCredito) is offering €15.4 billion ($18.6 billion) for HVB, plus several billions more to buy out minority shareholders in two of the German bank’s subsidiaries in Austria and Poland. Until now, the only significant cross-border retail-banking deal in Europe was last year’s takeover of Britain’s Abbey by Spain’s Banco Santander Central Hispano (SCH). When seeking growth opportunities, Europe’s big banks have tended to look either at home or further afield outside Europe. The lack of consolidation means that retail banks’ costs continue to vary hugely from one European country to the next. Were banks able to compete more freely across borders, many consumers might benefit from lower prices.

Several reasons are often given for the reluctance of European banks to engage in cross-border liaisons. Cultural differences are often mentioned first. There is a belief that differing consumer habits and expectations of banking services have discouraged banks from looking elsewhere in Europe for partners. At the same time, much is made of the local relationships and knowledge that drive a successful bank. Undoubtedly there might be some difficulties for a bank moving into new territory but these are surely overstated. For example, SCH and its big Spanish rival Banco Bilbao Vizcaya Argentaria (BBVA) have made a number of big and largely successful acquisitions across Latin America in recent years. Some 70% of the earnings of HSBC, Britain’s biggest retail bank, come from abroad.

A far greater deterrent to Europe-wide integration is that the two arms of a merged bank would have to operate under different regulatory regimes while lacking a centralised payments mechanism. Dealing with a jumble of rules means that any truly pan-European bank would find it hard to offer comparable products to customers in all the countries in which it operated. Often it is regulations, rather than the demands of customers for differing levels of service, that account for price variations. And even if it were possible to offer homogeneous products across the continent, payments originating from a bank in another country could take many days to process, thereby giving domestic banks a competitive advantage over ones run from another European country.

In spite of such obstacles, UniCredit is aiming in the long term to create cross-border “product factories” throughout the combined banking group. This will be quite a challenge, since it will also involve making all the group’s computing systems compatible across all the countries where it has retail bank branches.

The EU’s leaders have been talking for years about what they can do to help banks overcome the obstacles and foster the creation of an integrated market in financial services. But the EU’s financial services action plan, launched in 1999, has made slow progress and is proving unpopular among the banks themselves. They complain that the welter of new regulations proposed in the plan will in fact hamper progress and add to costs.

It is ironic that an Italian bank is leading the biggest attempt yet at pan-EU banking, given the efforts that Italy’s regulators have made to frustrate attempts at consolidation. Antonio Fazio, the governor of Italy’s central bank, who has resisted foreign banks’ efforts to buy domestic ones, is currently facing two such challenges. BBVA is mulling a bid for Banca Nazionale del Lavoro; while ABN AMRO of the Netherlands is after Banca Antoniana Popolare Veneta (Antonveneta) and, on June 10th, raised its offer for the 80% or so that it doesn’t own, to value Antonveneta at €7.6 billion. Five days later, Banca Popolare di Lodi, a rival domestic bidder favoured by Mr Fazio, upped its own offer for Antonveneta to trump ABN AMRO's latest bid. If pressure from both the European Commission, and domestic critics that want Italy’s highly fragmented market to become more competitive, force Mr Fazio to wave through the foreign bids, other Italian banks could become targets.

Economic nationalism of this sort, standing in the way of consolidation, is in evidence elsewhere in Europe. On June 13th, Handelsblatt, Germany’s biggest financial newspaper, echoed national sentiment with a call for more “ambition and patriotism” to stop Germany’s other big retail banks from falling into foreign hands in the wake of HVB’s takeover. And the paper’s desire for “global champions in the financial sector” (meaning national champions) is shared across much of Europe.

The German paper also urged mergers among Germany’s poorly performing banks to deflect foreign predators. This reflects another factor holding back bank consolidation across borders—the fragmented nature of banking in countries such as Italy, Germany, Spain and France. Here a simpler route to growth for ambitious banks is consolidation at home where big gains are still on offer. Rather than pay the higher prices needed to secure banks in other countries banks prefer the rewards of domestic consolidation.

A further obstacle to consolidation is that cross-border mergers in Europe are difficult to pull off. Gaining regulatory approval is often onerous. Deals often take a long time to come to fruition and do not always offer the potential for job cuts and cost savings that might accompany a domestic merger. Even so, UniCredit executives said on Monday that once the merger with HVB goes through they would seek to cut around 9,000 jobs, or about 7% of the current workforce, over the next three years.

Yet another factor inhibiting pan-European banking mergers is the justifiable scepticism over the benefits of such deals. One of Europe’s few truly cross-border banks, a Danish-Finnish-Norwegian-Swedish combination called Nordea, is widely considered to have fared poorly. A study by A.T. Kearney, a consultancy, of the Abbey-SCH takeover concluded that it did not create value. It is unsurprising therefore that banks’ shareholders are unenthusiastic about them entering into deals that are expensive and difficult to complete and which may not yield the promised results.

Given all the difficulties, do not expect UniCredit’s bid for HVB to trigger a flurry of pan-European bank deals, even if it ultimately succeeds. What it might do is set off a wave of domestic consolidation in Germany and perhaps other EU countries with fragmented financial systems. At least this will be something.

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