Go big or go home! (Finrestra podcast episode 3 transcript)

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Transcript:

“Hello and welcome to another episode of The Finrestra Podcast.

My name is Jan Musschoot.

The topic of today’s episode: Go big or go home!

According to economic theory, banks have good reasons to expand abroad. Bigger banks should benefit from economies of scale. A broader geographic footprint results in a more diversified loan portfolio. So multinational groups should be more resilient against economic downturns.

However, cross-border expansion is not what we observe in the real world. In fact, multinational banks have been selling their foreign subsidiaries for years. Earlier this year, American Citibank announced that it would exit retail banking in 13 countries, most of them in Asia. Last year, Spanish bank BBVA sold its unit in the United States.

Banks are also selling their foreign activities in Europe. Here are some examples, all from 2021.

British HSBC was so desperate to get rid of its French retail bank, that it sold the unit for one symbolic euro. Dutch ING also plans to leave the French retail market. That same ING has sold its retail bank in Austria. Dutch Rabobank decided to wind down its Belgian retail activities, as it couldn’t find a buyer. British NatWest and Belgian KBC have announced they would exit the Republic of Ireland. 

Bankers have good reasons to leave foreign markets. Because policymakers are scared of “too big to fail” banks, so-called systemically important banks need larger capital buffers. More countries also means higher costs for reporting and compliance. Banks have learned that there are few synergies between countries, even for branchless banks that only offer online services, like ING and Rabobank. 

That’s why there is a clear trend towards deglobalization.

But that’s not the end of the story. Not all banks are returning to their domestic past.

Economies of scale are a thing, but not in the sense that bigger is always better.

What you want is to have scale within a market.

A good example is Societe Generale. The French financial services group sold most of its Central and Eastern European units. But SocGen kept its subsidiaries in the Czech Republic and in Romania. In both countries, these banks are the third largest in the market. Hungarian OTP sold its small subsidiary in neighboring Slovakia to KBC-owned CSOB. But OTP has also recently signed a deal to buy the second largest bank of Slovenia. Merged with its existing Slovenian subsidiary, it will become the market leader. And this silent consolidation isn’t limited to the East. French Credit Agricole has been gradually increasing its market share in Italy, for example.

So while European policymakers despair at the lack of cross-border mergers and acquisitions, the much needed consolidation is happening. Banks are reducing their geographic complexity.

And some groups have become robust multinational banks that have a significant market share in multiple countries.

If you want to discuss banks’ strategy, you can find me on Twitter @janmusschoot.

To learn more about our research and courses, check out our website, finrestra.com.

Thanks for listening!”

Financial news November 2021

I also covered the news in the first Finrestra episode of December:

Financial news October 2021

International bank divestments

From the 1990s until the global financial crisis, there was a wave of consolidation and international expansion by Western European banks. Over the past decade, M&A activity has been a fraction of what it used to be. International banks have sold part of their foreign subsidiaries, either volontarily or because regulators forced them to slim down.

Who did they sell to? Often to local or regional banks.

Examples (note that this is a work in progress!):

Africa

Barclays (UK) sells its controlling stake in Absa (South Africa and 9 other African countries) to investors (2017)

Americas

BBVA (Spain) sells BBVA USA to American PNC Financial Services Group (2020)

Asia and the Middle East

Dexia (Belgium) sells Denizbank (Turkey) to Russian Sberbank (2012)

National Bank of Greece (Greece) sells Finansbank (Turkey) to Qatari QNB (2016)

Sberbank (Russia) sells Denizbank (Turkey) to (United Arab) Emirates NBD (2019)

ABN AMRO (Netherlands) winds down its corporate banking activities in Asia, Australia, Brazil and the US (2020)

UniCredit (Italy) sells most of its stake in Yapi Kredi (Turkey) (2020)

HSBC (UK) wants to exit Turkey (2020)

Citigroup (US) sells its retail banking activities in 13 markets, mainly in Asia (2021)

Central and Eastern Europe

AIB (Ireland) sells its stake in Bank Zachodni (Poland) to Spanish Santander (2010)

Barclays (UK) sells Expobank (Russia) to Russian financier Igor Kim (2011)

KBC (Belgium) sells Kredytbank (Poland) to Spanish Santander (2012)

KBC (Belgium) sells its minority stake in Nova Ljubljanska Banka (Slovenia) to Slovenia (2012)

KBC (Belgium) sells Absolut Bank (Russia) to Russian investors (2012)

Erste (Austria) sells its subsidiary in Ukraine to Fidobank (2012)

KBC (Belgium) sells KBC Banka (Serbia) to French Société Générale and Norwegian Telenor (2013)

National Bank of Greece (Greece) sells UBB (Bulgaria) to Belgian KBC (2016)

UniCredit (Italy) sells its controlling stake in Pekao (Poland) to local investors (2016)

RBI (Austria) sells its bank in Slovenia to Biser Bidco (2016)

Alpha Bank (Greece) sells Alpha Bank Srbija (Serbia) to Serbian AIK Banka (2017)

Cyprus Popular Bank (Cyprus) sells Marfin Bank (Serbia) to Expobank CZ (Czech Republic) (2017)

Eurobank (Greece) sells Bancpost (Romania) to Romanian Banca Transilvania (2017)

National Bank of Greece (Greece) sells its subsidiaries in Serbia to Hungarian OTP (2017)

Piraeus Bank (Greece) sells its unit in Serbia to Serbian Direktna Banka (2017)

Société Générale (France) sells most of its Central and Eastern European subsidiaries to Hungarian OTP (2017-2019)

Société Générale (France) sells Euro Bank (Poland) to Portuguese Millennium bcp (2018)

Bausparkasse Schwäbisch Hall (Germany) sells its stake in CMSS (Czech Republic) to Belgian KBC (2019)

Piraeus Bank (Greece) sells PBB (Bulgaria) to Greek Eurobank (2019)

Danske Bank (Denmark) sells its unit in Estonia to Estonian LHV Pank (2020)

Danske Bank (Denmark) sells its business in Latvia to Latvian Citadele Bank (2020)

Handelsbanken (Sweden) closes its branches in Germany and Poland (2020)

ING (Netherlands) exits retail banking in the Czech Republic (2021)

Crédit Agricole (France) sells its subsidiary in Serbia to Austrian RBI (2021)

RBI (Austria) sells its subsidiary in Bulgaria to Belgian KBC (2021)

For more on bank consolidation in Central and Eastern Europe, see this report by Deloitte.

Western Europe

Citigroup (US) sells its retail banking activities in Belgium to French Crédit Mutuel Nord Europe (2012)

Barclays (UK) sells its retail branches in Italy to Italian Mediobanca (2015)

HSBC (UK) wants to sell its retail banking operation in France (2020)

Degroof Petercam (Belgium) sells its private banking activities in Spain to Andorran Andbank (2020)

Rabobank (Netherlands) shuts down its online savings bank in Belgium (2021)

ING (Netherlands) sells its retail banking activities in Austria to Austrian bank99 (2021)

Handelsbanken (Sweden) will exit Denmark and Finland (2021)

Exceptions

BBVA (Spain) increases its stake in Garanti (Turkey) to 49.85% (2017) and launches a bid for the remaining shares (2021)

Crédit Agricole (France) buys three small banks in Italy (2017) and another one in 2020.

KBC (Belgium) buys OTP Banka Slovensko (Slovakia) from Hungarian OTP (2020)

Random reads summer 2020

Banking update August-September 2020

  • ABN AMRO exits all its non-European corporate banking activities
  • CaixaBank and Bankia are planning a merger
  • HSBC wants to sell its French retail network
  • Rumors of a merger between Credit Suisse and UBS

The strategy of European banks ever since the Global Financial Crisis has been to focus on profitability1. How do you achieve a higher return on equity? There are two commonly followed options. Either you cut costs, e.g. by merging banks in the same geography and closing down the redundant branches. Or you sell the business, especially when you’re an also-ran outside of your home market.

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

Update 23 July 2020: Marc Rubinstein at Net Interest came to the same conclusion: “Coming out of Covid, when banks realise they don’t need such a large physical presence, further consolidation is likely. What’s more, if equity valuations don’t recover, banks may be able to use negative goodwill to cover restructuring charges.”

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?