Investing in Bank Stocks The Strategic Dimension by crawfordhanes

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									THE INTERNATIONALISATION OF BANKING:
               LESSONS OF EXPERIENCE

        Presentation to EBR Forum by Steven I. Davis


Milano
17 July 2003


                                                       Davis International
                                                       Banking Consultants

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AGENDA



 •   why and how: the strategic alternatives

 •   the results to date

 •   outlook for the future




                                               Davis International
                                               Banking Consultants

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                                   Goals & Strategies




1)   INTERNATIONAL GOALS AND STRATEGIES




                                              Davis International
                                              Banking Consultants

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                                                 Goals & Strategies



POSSIBLE OBJECTIVES



•    supplement limited domestic growth opportunities

•    client needs

•    products/services/capabilities to export

•    hubris!


                                                            Davis International
                                                            Banking Consultants

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                                                Goals & Strategies



POSSIBLE OBJECTIVES: THE KEY DIMENSIONS



•    client segments: retail,        SME,   affluent/HNW,      major
     corporate/institutional, etc.

•    products: credit cards, mortgages, consumer finance, fund
     management, capital markets, derivatives, custody etc.

•    geographic: regional, ‘pan EU’, CEE etc.


                                                            Davis International
                                                            Banking Consultants

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                                                  Goals & Strategies



THE POSSIBLE VEHICLES

•    organic growth: put people on the ground

•    strategic alliances/minority interests

•    acquisitions: from toehold to mergers of equals




                                                             Davis International
                                                             Banking Consultants

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2)   THE RESULTS IN EUROPE SO FAR




                                    Davis International
                                    Banking Consultants

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                                                     Results so far



A)    ORGANIC GROWTH

 •   some general observations:

     – most are deterred by the long term payoff: ‘we want
       results now’
     – the big issue: can you really add value in a new market?
     – few real successes
         – most are product-led




                                                                  Davis International
                                                                  Banking Consultants

                                8
                                                                 Results so far

SUCCESS STORIES AND WHY:
institutions                               success factors
Svenska Handelsbanken                         strong, decentralised branch model;
 branches abroad                           rigorous performance criteria

‘Big Three’ US investment                 superior global model (research,
banks (Goldman, Morgan                     distribution, client coverage); willingness
Stanley, Merrill)                          to subsidise from US profits


BUT LOTS OF FAILURES:
– closing/shrinking of branches in major financial centres, ‘Europe is our
  home market’ of the 1990s, regional units in major markets like US and UK

– conclusion: very few commercial banks have a real competitive advantage
  outside their home market against well-managed local banks       Davis International
                                                                             Banking Consultants

                                       9
                                                     Results so far

B) STRATEGIC ALLIANCES AND MINORITY INTERESTS

 • some general observations:

    – rarely a preferred choice: counter-cultural for most banks!

    – product/distribution relationships usually more successful:
      a true commercial relationship

    – changed circumstances have upset even the most successful
      alliances: industry consolidation, new people, etc.

    – need special attention from top management

    – plan the divorce in advance!
                                                                 Davis International
                                                                 Banking Consultants

                                10
                                                            Results so far

SOME NOTABLE FAILURES:
institutions                        reason for failure
Dresdner/BNP                       inability to agree on strategy, internal
                                     competition

Banco Comercial Portugues/         partner becomes competitor
BCH

Robert Fleming                     partners are taken over (and so is
and Unibank etc                     Fleming eventually)

CCF/BHF                            partner is taken over

Carivita                           conflict among stockholders

WestLB                             partners taken over
Rabo/DG                            disagreement over strategy           Davis International
                                                                         Banking Consultants

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                                                       Results so far

SOME MORE SUCCESSFUL ALLIANCES - AT LEAST SO FAR!
institutions                      comments
Royal Bank of Scotland           pragmatic, led from the top
BSCH

ABN/NM Rothschild:               product/distribution in equity markets;
                                  strong personal relationships

Swedbank in Norway and           25% interests have current problems
Finland

BBVA/BNL and ABN Amro            a pragmatic approach to the Italian
/Antonveneta                      market!

Cetelem and numerous             value added in consumer finance
local partners
                                                                    Davis International
                                                                    Banking Consultants

                             12
                                                  Results so far



C)    ACQUISITIONS

 •   key success factors

     – the financial numbers: how can you add stockholder value
       (buy cheap, achieve synergies)
     – quality and positioning of institutions acquired: nasty
       surprises, too small, wrong segment, etc.
     – ability to manage acquisition: strength of local
       management, cultural fit



                                                              Davis International
                                                              Banking Consultants

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                                             Results so far
   Cross border mergers/acquisitions in EU


                                             Merger of equals
                                             Acquisition




                                                           Davis International
                                                           Banking Consultants
Source: DIBC
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                                                                                              Results so far

IN-MARKET COST SYNERGIES DWARF CROSS-BORDER SAVINGS
                                          (Savings as % of smaller/acquired institution)
Type                                  Acquirer    Country             Target      Country   Year   %Target cost

In-market               Lloyds          UK                               TSB          UK    1995           31%
                          SBC Switzerland                                UBS Switzerland    1997           45%
                  Bank Austria      Austria                      Creditanstalt    Austria   1997           41%
                   Vereinsbank    Germany                          Hypobank     Germany     1998           30%
                          BBV         Spain                        Argentaria       Spain   1999           46%
                          BNP        France                           Paribas      France   1999           17%
                          DnB      Norway                         Postbanken     Norway     1999           16%
                     Santander        Spain                              BCH        Spain   1999           44%
                  Danske Bank     Denmark                       RealDanmark     Denmark     2000           37%
                          SEB      Sweden                          Swedbank      Sweden     2001        18-22%
               Credit Agricole       France                   Credit Lyonnais      France   2003        15-19%
                          DnB      Norway                          Gjensidige    Norway     2003           37%
Cross-border       Nordbanken      Sweden                            MERITA       Finland   1997            7%
             MeritaNordbanken       Nordic                       Unidanmark     Denmark     2000           11%
             MeritaNordbanken       Nordic                         Christiania   Norway     2000           11%
Bancassurer       Credit Suisse Switzerland                        Winterthur Switzerland   1997            4%
                          SEB      Sweden                        Trygg Hansa     Sweden     1997           25%
Source: Company data and Smith Barney analysis

                                                                                                             Davis International
                                                                                                             Banking Consultants

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                                                     Results so far




•   the lessons of experience in cross-border M&A:

    – local acquirers usually get the best deals - for financial,
       political and cultural reasons
    – winners are those who attract and retain the best local talent
    – extremely difficult to export a successful retail banking model
       or product
    – most acquisitions are too small/badly positioned as base for
       development
    – acquirers usually overestimate the value they can add and the
      time and investment it takes

                                                                 Davis International
                                                                 Banking Consultants

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                                                            Results so far

SOME NOTABLE FAILURES - AND WHY!
institutions                           problems
‘Big Bang’ acquisitions of            too small, good people left, no value
brokers in UK, Europe                  added by buyer

‘Europe is our home market’           too small, lack of value added by buyer
 purchases by CL, San Paolo,
 Barclays, etc

Citibank buys CentroSud in            even global banks make
Italy                                  mistakes!

Spanish banks in Argentina,           local market deteriorates
etc.


                                                                        Davis International
                                                                        Banking Consultants

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                                                      Results so far

THE JURY IS OUT ON SOME INTERESTING CASE STUDIES:
institutions                     issues
HSBC buys Household             buy cheap, but can they manage the
 Finance                          risks?

Nordea and other full           are there net merger synergies?
cross-border mergers

SEB and BfG                     can competitive ROE be achieved in
                                 German market?




                                                                   Davis International
                                                                   Banking Consultants

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                                                     Results so far

•   the challenge of executing a cross border M&A
    Quotations at our International Bank Planners Forum seminar
    in November 2002:

    – BBVA in Latin America: ‘implementation must be customised
     (because of cultural differences); parameters ought to be local to
     adapt to a market reality. You win the game at the execution
     level!’

    – Nordea in Nordic region:’ We have failed to understand the
      time frame needed to effect change’

    – UniCredito in CEE: ‘Culture differences will continue to drive
      different and unique behaviours and needs/wishes….a multilocal
      model’.
                                                                 Davis International
                                                                 Banking Consultants

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3)   THE OUTLOOK FOR THE FUTURE




                                  Davis International
                                  Banking Consultants

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                                                        Results so far
•   the mega cross border merger will be the exception, not the rule

     – culture, political and economic forces will offset the ‘logic’ of
       pan-EU mergers
     – most deals will be specialist and/or relatively small
•   few signs of the ‘pan-Euro’ product
     – but credit cards/consumer finance offer growth prospects
     – the global investment banks will continue to dominate the
       capital market sector

•   banks will continue to overestimate their real value added
    and underestimate the time frame/difficulty of achieving synergies

     – enormous pressure from investors to do deals
•   alliances will remain a poor third choice after organic growth
    and acquisitions                                                Davis International
                                                                    Banking Consultants

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