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JULY 12, 2004
Where Are Europe's Superbanks? Unless cross-border mergers begin, the banks may be left in the global dust There was probably no one reason why Credit Suisse Group's board abruptly ousted John J. Mack as co-CEO on June 24. The Swiss giant's investment-banking unit, Credit Suisse First Boston, hadn't been churning out deals the way it once did. There were cultural clashes between the hard-nosed former Morgan Stanley exec, who was based in New York, and Credit Suisse top brass in Zurich. But among all the reasons Mack was let go, one stood out: He felt Credit Suisse could only prosper if it merged with another big bank, such as Deutsche Bank. With Mack's departure, one more scheme to build a cross-border banking titan in Europe bites the dust. That's a shame -- and a reminder that Europe Inc. is still a work in progress. It has been years now since much of Europe abandoned national currencies for the euro. The European Central Bank sets monetary policy from its gleaming Eurotower headquarters in Frankfurt. A new draft constitution, adopted in mid-June by the EU's 25 nations, further expands economic ties. Yet there's little momentum to move beyond national frontiers when it comes to banking. "The reality is that it's just not happening," says Arnaud de Toytot, managing director of Standard & Poor's Financial Institutions in Paris. Britain is the notable exception. It is home to several big banks -- most notably kingpin HSBC Holdings PLC -- that have built up sizable international franchises, in many cases by expanding to the U.S. And quite a few continental European bankers, notably Deutsche Bank CEO Josef Ackermann, seem as determined as Mack to try to merge their way across borders. But there has been little follow-up. The result: Just as America's banks are bulking up, euro zone banks are looking awfully small. Ten years ago, Germany's three top financial institutions each sported market capitalizations far exceeding their largest U.S. counterparts. Today, Citicorp's market capitalization is five times that of the euro zone's most valuable bank, France's BNP Paribas. What about Germany's once-mighty banks? Only Deutsche Bank makes the list of the European Union's 10 most valuable financial institutions -- in 10th place. In truth, there has been an unprecedented wave of consolidation in European banking -- but it has been within countries, not between them. The concentration has forced bankers such as Francisco González, chairman of Spain's Banco Bilbao Vizcaya Argentaria, and Rijkman Groenink, chairman of the Netherlands' ABN Amro (ABN ), to start looking abroad. But expanding inside Europe has been tough going. Until now, investors haven't been convinced that cross-border banking tie-ups can create value. Retail banking in Europe is still driven by widely differing local regulations and national tax regimes. Uniting banks in two different countries usually means having to maintain unique financial products for each market. Since European banks don't have branch systems that overlap into other nations, costs can't easily be cut after a merger. But size does matter in the world of wholesale banking, where large, multilingual corporate customers such as Siemens and Vodafone are concerned about a bank's global reach and its ability to take on risk. Bigger is definitely better when it comes to underwriting equity issues, which is one reason American megabanks are besting the locals within Europe on such deals. And when large pension funds have to sell baskets of stocks in a market downdraft in order to maintain solvency requirements, only deep-pocketed institutions are able to stomach the risk. That's why officials must start encouraging consolidation instead of decrying it. "European governments and bank boards have to understand they can no longer be protectionist," says Gary Parr, deputy chairman of Lazard LLC and a leading bank-merger specialist. "Remaining independent and national is not a good option." But the truth is that powerful retrograde forces in europe are determined to prevent consolidation, as John Mack realizes now that he has been forced to begin his summer vacation early.  By John Rossant
BW MALL
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