The case for a corona consolidation of European banks and insurers

Many European banks and insurance companies are trading well below their book value.

Large firms can unlock a lot of value by taking over smaller competitors, thanks to the negative goodwill. Consolidation would support the profitability of the financial industry.

Italy

Italian banks in particular would benefit from a consolidation of their fragmented domestic market1. In February, Intesa Sanpaolo launched a bid for UBI Banca. UniCredit should consider a similar deal with Banco BPM, Banca Monte dei Paschi di Siena or BPER Banca. Also, French BNP Paribas could merge its subsidiary BNL with one of those banks.

Spain

Spanish banking is already quite concentrated. Santander took over Banco Popular in 2017. The integration was completed in 2019. Santander and BBVA could acquire Bankinter, Bankia, or Banco de Sabadell. Of course, further domestic growth of the majors depends on regulatory approval. The two global Spanish banks definitely have the expertise to execute such an operation.

Figure 1 shows the number of bank branches relative to population for Spain, Italy and the Netherlands. It’s clear that Italy and Spain have a lot of potential for cost cutting.

Figure 1: Commercial bank branches per 100,000 adults in Spain, Italy and the Netherlands. Source: World Bank.

Portugal, Poland and the Netherlands

In neighbouring Portugal, Banco Comercial Português seems a good match for Santander. Especially since both Iberian banks are active in Poland. Speaking of Poland, Santander and ING might be interested in mBank. mBank is owned by Commerzbank, a bank that desperately needs to focus its strategy.

A foreign group could shake up the uncompetitive Dutch market by buying ABN AMRO. However, as most of ABN AMRO is still state owned, this will be complicated.

Insurance

Many listed insurers like Aegon, NN Group (NL), Ageas (BE), Baloise, Swiss Life (CH) or UnipolSai (IT) trade at a significant discount to their book value. This could be an opportunity for big insurance companies AXA, Allianz and Zurich Insurance Group.

Consortiums of buyers could also divide the operations of their targets (although there is a bad precedent for this scenario).

Exciting times!

Update 9 June 2020: Banco Sabadell plans to close 235 branches

Three ways to attract new bank customers

Any banker will tell you that it’s not easy to attract and keep new clients. Why do people change banks? I see three reasons:

  1. Home buyers get better terms on a mortgage compared to their existing bank.
  2. Savers get a higher interest rate on their savings.
  3. The new bank has better services.

Roughly speaking, (1) is the stategy of traditional banks. Online savings banks attract deposits with (2) and fintechs employ strategy (3)1.

Let’s apply this framework to NewB, a new Belgian bank (yes, it’s really called NewB). How easily it will attract customers?

  1. You can’t get a mortgage at NewB.
  2. The interest rate on its savings account will be zero percent, which is less than the minimum of 0.11% at other banks.
  3. Finally, there’s no indication that it will delight customers with superior services.

So NewB scores zero out of three.

Yet NewB’s business plan expects the bank to have 277 million euro in deposits by the end of 2024.

Some Chinese banks offer pork meat as a reward for opening an account. Maybe NewB should give an Impossible Burger to new customers? Otherwise, this is gonna turn into Mission: Impossible.

Where do banks make money?

The FRED (Federal Reserve Economic Data) database is a treasure trove for bank geeks.

Bank’s return on assets by nation is one of many statistics that can be visualized with GeoFRED (click this link).

As you scroll through the years, you’ll notice a few patterns.

Return on assets is low in Western and Southern Europe, as well as in Japan.

Banks in the Americas, Africa and Central Europe achieve higher returns.

I’m curious to know what conclusions bank CEOs and regulators draw from these maps.

What are your thoughts?

Further reading:

Where in the world are banks profitable? (FRED blog)

Rethinking bank profitability (FT Alphaville, free but registration needed)

Cross border financial services: Europe’s Cinderella?

Cross border financial services: Europe’s Cinderella?

The Belgian Financial Forum and SUERF held a colloqium about cross border financial services in Europe.

An impressive line-up of speakers from the public and private sector discussed why European banks don’t sell more services outside their home countries.

Some pointed out that regulation is still fragmented along national borders – despite the banking union.

But the recurring theme of the day was the lack of profitability. There is no business case for mergers and acquisitions. Countries like Germany and Italy have way too many banks.

Chart by Morgan Stanley, via Johannes Borgen

The industry would be better off with fewer players, but nobody wants to take over small banks with wafer-thin margins.

You can read my Twitter thread about the event here.

The slides of the presentations are available here.

Why KBC Group has a larger market cap than Deutsche Bank

See my tweets from a couple of weeks ago. I’ll have more to say on the blog (including the potential merger/acquisition of Commerzbank) if I find the time…

Foreign owned banks in Europe

How international is the European banking landscape?

Jamie Dimon, CEO of American bank JPMorgan Chase, says that European banks need mergers across borders in order to become more competitive. I created the map below to illustrate that Dimon has a point (that’s why he’s richer than you).

Flags show the nationality of the owner of the largest foreign owned bank. Subsidiaries and their parents are listed in the text.

Some remarks and observations: Continue reading “Foreign owned banks in Europe”