European Bank Mergers Remain Family Affairs

Despite all the crossborder merger activity in Europe's other sectors, banks are still reluctant to head to the altar.
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The merger between Societe Generale (SCGLY) and Paribas was welcomed by the markets Monday, but this strictly family affair is yet another example of the consolidation process in Europe's banking industry only going halfway.

The seeming reluctance of banks in Europe to merge with their continental counterparts contrasts with what is happening elsewhere in Europe. The insurance industry appears to have no qualms about teaming up with foreign firms. On the same day the SocGen-Paribas deal was announced, the French insurer

AXA

(AXA)

said it had bid for British insurer

Guardian Royal Exchange

.

There have been some tentative moves by banks toward crossborder mergers. The Dutch bank

ING

(ING) - Get Report

has a large stake in the French bank

Credit Commercial de France

.

Banco Comercial Portugues

(BPC)

has formed a trans-Iberian partnership with

Banco Santander

(STD)

. (This alliance is now in some doubt following Santander's merger with

Banco Central Hispano

(BCH) - Get Report

).

But these deals are small change compared to the mergers between Spain's Banco Santander and Banco Central Hispano;

Union Bank of Switzerland

and

Swiss Bank

; and Germany's

Hypo-Bank

and

Bayerische Vereinsbank

.

"It's still more flirting than consummation," says Joe Hall,

Deutsche Bank

's head of marketing in European equities.

And yet consolidation among Europe's banks is inevitable as margins in domestic markets are squeezed, and the euro and globalization make it both easier and more critical for foreign competitors to do business across borders. But there remains a number of impediments peculiar to the banking industry to crossborder mergers.

Apart from the obvious cultural and linguistic differences in Europe, you just can't get away from politics, especially French politics.

Like it does in its defense industry, the French government interferes in its banking system. Indeed,

Credit Lyonnais

, one of the largest French banks and a notorious guzzler of public funds, is still in state hands, although that is due to change soon as the government is accepting bids from the private sector. However, don't expect the government to be particularly receptive to a bid from German bank

Allianz

, which is reportedly interested.

The most obvious result of this state meddling in the French banking sector is that in general, French banks are in the worst financial state.

SocGen, considered to be France's strongest bank, is estimated by

First Call

to post earnings per share of $2.43 in 1998. By comparison, ING is forecast to have earnings per share of $3.12 and

Barclays Bank

(BCS) - Get Report

, $5.81.

One problem, of course, is that if there's a financial crisis in the world (and we've not been short of a few lately), the French banks are sure to figure in it somewhere

"The French banks' lending to Asia was huge. No one wants to get too involved with the French banks -- they're the worst of the bunch financially," says Michael Ward of

International Assets Advisory

.

A Protected Industry

The very reasons for mergers among banks also mean that political backing for any merger is crucial. Unlike in the insurance business, where mergers allow synergies such as sharing sales forces, the driving force behind many bank mergers is cost-cutting, a euphemism for layoffs. Better to have at least the tacit backing of politicians when explaining to a truculent workforce the necessity of downsizing than have them openly blame the heartless foreigners for firing their constituents.

However, Klaus Martini, head of European equities at

Deutsche Fund Management

, concedes this may not be a purely French problem: "You'd probably get the same thing happening in Germany."

Cultural ties with Latin America have meant Spanish banks focused their investment there to make up for falling margins at home. Banco Santander and

Banco Bilbao Vizcaya

(BBV)

have been among the most aggressive of the European banks in the region, with about $3.8 billion and $2.5 billion invested in the region, respectively.

In light of the problems after the Brazilians devalued the real, the Spanish banks might have been better off investing nearer to home. But because the situation in Latin America has yet to play out fully, the prospect of things getting worse there hardly makes the Spanish banks look like attractive merger partners.

There are other problems that may hinder mergers between foreign banks: the European tendency for cross-shareholding between banks, the potential costs associated with Holocaust claims and the simple fact that many in management aren't willing to give up the national identities of their banks in the name of shareholder value.

All Locked Up and No Place to Go

Ironically, until now it's been easier to arrange crossborder mergers across the Atlantic rather than across the Alps.

Deutsche Bank

(DTBKY)

last year announced it was buying

Bankers Trust

(BT)

, and there is talk of another large German bank,

Dresdner Bank

(DRSDY)

, joining forces with

PaineWebber

(PWJ)

.

With most analysts dismissing for now any moves between the French and Germans, the prime targets for crossborder mergers appear to be the Italian banks. Lately, there has been a lot of speculation concerning Deutsche Bank's interest in Italy's

Banca Commerciale Italiana

and

Unicredito

.

The reason for this is that Italian banks still remain minnows compared with the British, German and French banks, even after a hectic round of consolidation.

San Paolo-IMI

, Italy's largest bank, has a market capitalization of around $200 million, which is dwarfed by the likes of Deutsche Bank. Italian banks' small size, gross inefficiencies and total disregard for shareholder value mean they are ripe for purchase by other European banks.

Merrill Lynch

said in a report that it is hopeful that any major crossborder deal would be a real catalyst for wholesale corporate activity in Europe's banking industry. Perhaps, but as with most things in Europe, you wouldn't want to bank on it.