A local opportunity for besieged European banks
As pandemic-related restrictions ease and business picks up, European banks are returning to the challenge of profit growth despite rocketing interest rates. One prospect that doesn’t get enough attention are the offers that might show up on their doorstep.
Vaccine deployments are ushering in an economic recovery in Europe, just as the trade boom that has driven many banking results over the past year is normalizing. The prominent territory is infamous for lenders in the region: trying to increase profits in an overbanked and fragmented market with consistently ultra-low interest rates, while competing against larger, more profitable US competitors.
Higher interest rates seem unlikely. Eurozone inflation climbed to 2% in May and is expected to continue rising this year, but far from recent US levels. While the Federal Reserve in Washington on Wednesday raised the specter of a rate hike from 2023, European benchmarks are almost certain to remain very low for years to come.
The preferred solution for many banks is to merge with a big rival to create a pan-European lender that can cut costs and take on US banks globally. Such cross-border mergers are not a panacea, but could work. However, the region’s current regulations stand in the way and proposals to change these rules remain at a standstill.
A less discussed option is a local merger. Major European lenders are already achieving decent returns in their home markets, thanks to deep-rooted expertise, brands and operational scale. Building on their national strengths might be a simpler approach than correcting their global weaknesses.
Nationwide banking tends to produce higher returns on equity. Major banks outperform the market average in their home market by around 2 percentage points, according to a study by analysts at Credit Suisse.
And there is business to be done. Last year Italian Intesa Sanpaolo bought UBI Banca and in Spain CaixaBank merged with Bankia. There is room for more reconciliation in both countries. Germany is also ripe, although the failure of talks between Deutsche Bank and Commerzbank in 2019 has cooled this market. The too many British “challenger” banks are also obvious targets.
So far, however, there are few takers. Banco Sabadell has struggled to sell its UK-based TSB business. After long efforts, HSBC is finally set to sell its retail business in France to private equity firm Cerberus Capital Management, according to a Bloomberg report this week.
Domestic transactions face three major challenges. After years of unwinding the consolidation boom of the mid-2000s, many lenders and investors remain wary of building empires in a slow-growing Europe. For the few willing people, the pandemic has made it extremely difficult to assess a rival’s loan portfolio and agree to terms. And the big banks face competition concerns over increasing their market share.
On this last point, however, the pandemic could actually help. In the aftermath of the two previous economic crises, regulators were more concerned with bailouting banks than with the growing power of the market. While lenders are generally much better capitalized today, some will find it difficult to roll back support programs to reveal overburdened borrowers. This could create opportunities for domestic rivals to strengthen themselves. Their local knowledge would help navigate the delicate policy of streamlining local branch networks.
Without deals, most European banking strategies will focus on the daily drudgery of exiting unprofitable companies and investing in IT to cut costs, sell more products and fend off fintech startups. A local shopping spree is not for everyone, but such opportunities should not be overlooked in an industry with few options to impress investors.
Write to Rochelle Toplensky at [email protected]
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