A Survey of International Banking May 20Th 2006
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Thinking big A survey of international banking May 20th 2006 Republication, copying or redistribution by any means is expressly prohibited without the prior written permission of The Economist The Economist May 20th 2006 A survey of international banking 1 Thinking big Also in this section Calmer waters After decades of wrenching change, Ameri- can banks are now mastering new business models. Page 3 The risk-takers Investment banks are a race apart. Page 4 One Basel leads to another The dicult business of drawing up new international banking rules. Page 6 What single market? But western European banks are beginning to do more cross-border business. Page 7 Gone shopping Austrian banks have led the way in eastern Europe. Page 9 A land of limited opportunities Russian banks worth having are few and far between. Page 10 Banks the world over are scrambling to become larger, whether by organic growth or by mergers and acquisitions, says Robert Cottrell. High living But how much does size matter? Brazil’s banks charge startling rates to private customers. Page 11 ORROWING and lending has become most everywhere, big banks have been B a fairly well-understood line of busi- getting bigger through mergers and acqui- Naturally gifted ness, and a fairly well-managed one most sitions as well as through organic growth. Overprotected it may be, but India’s banking of the time in most of the world. It is the Is there a natural limit to this process of sector is going from strength to strength. banks themselves that are volatile, shifting bank-eat-bank? Could the biggest bank of Page 12 shapes and strategies as furiously as their tomorrow be two or three or even ten regulators will allow them in their eorts times the size of a Citibank or an HSBC to- Proceed with caution to win markets and market share. In China day, and if not, why not? And who bene- they are escaping state captivity by selling ts? It is not always the surviving bank’s Financial services in China are set for huge shares to foreigners and stockmarket in- shareholders. One-half of recent bank growth, but there is no easy way in. Page 14 vestors. In Russia they are running wild, mergers around the world have destroyed with balance sheets growing by 30-40% a shareholder value, says Philippe De Back in business year. In Japan three new megabanks Backer, a partner in Bain & Co, a consulting Japan’s banks have restructured and consoli- have eaten 11 old banks and are now di- rm. In America it is medium-sized banks dated. Now they must nd new ways of gesting them. In central Europe foreigners that are prized most highly by the stock- making money. Page 16 have bought or built 80% of the top local markets, partly because investors expect banks since the fall of communism. them to be bought dearly by the big banks. A funny sort of privatisation In America the ten biggest commercial One argument commonly used in fa- The future of Japan’s postal savings bank banks control 49% of the country’s bank- vour of mergers, in banking as in many remains a mystery. Page 17 ing assets, up from 29% a decade ago. They other industries, is the pursuit of econo- are pausing for breath now, after a long mies of scale in areas such as procurement, The limits to size merger binge encouraged by the deregula- systems, operations, research and market- tion of interstate banking and the removal ing. But the gains from that in the mass pro- When banks go wrong, the biggest come o of barriers between banks, insurance com- duction of nancial services, though not worst. But that doesn’t stop the scramble for panies and securities rms. Non-nancial necessarily illusory, can be elusive. There growth. Page 18 companies are not meant to own banks, is a sizeable literature of academic papers but even that is now being tested by Amer- claiming that economies of scale can be Acknowledgments and sources are at ica’s biggest retailer, Wal-Mart, which exhausted by the time a bank reaches a rel- www.economist.com/surveys wants a restricted banking licence. atively modest size. A study of European This survey of commercial banking banks in the 1990s, published by the Euro- An audio interview with the author is at around the world is much preoccupied by pean Investment Bank, put the gure for www.economist.com/audio questions of size and of ownership. Al- savings banks as low as 600m ($760m) in1 2 A survey of international banking The Economist May 20th 2006 2 assets. More recent studies suggest far bank holding companies that are building higher thresholds, up to $25 billion. them clearly believe so. A decade of deals 2 Big banks might even dispute that there A third reason for banks to pursue Top ten bank mergers and acquisitions since 1995 is a limit at all. But at some point disecono- growth through mergers and acquisitions Deal value mies of scale will also start creeping in. is one that is never used as an argument at Target Acquirer/year $bn Management will nd it harder and harder the time, but is universally recognised as a UFJ Holdings Mitsubishi Tokyo 59.1 to aggregate and summarise everything factor. It is managerial ambition (which in- Financial Group/2005 that is going on in the bank, opening the cludes managerial error). Chief executives Bank One JPMorgan Chase/2004 56.9 way to the duplication of expense, the ne- want the gratication of running a bigger FleetBoston Bank of America/2003 47.7 glect of concealed risks and the failure of company, or they fear that their own com- Financial internal controls. Something of that last pany will be taken over unless they grab BankAmerica NationsBank/1998 43.1 problem aicted the world’s biggest bank another one rst. Citicorp Travelers Group/1998 36.3 holding company, Citigroup, in 2002-05, Managers can argue that the business MBNA Bank of America/2005 35.2 when it was rocked by a string of compli- environment is changing rapidly and that NatWest Royal Bank of 32.4 ance problems. America’s Federal Reserve banks must seize the new market opportu- Scotland/1999 reacted by telling Citigroup to suspend nities created by new technology or na- Wells Fargo Norwest/1998 31.7 large acquisitions, but lifted the order in tional deregulation or economic globalisa- JPMorgan Chase Manhattan/2000 29.5 April this year when it judged that the tion. Thus there is much talk in Europe Sakura Bank Sumitomo Bank/2000 25.8 company had got better controls in place. now of a fresh wave of cross-border merg- Source: Dealogic Another argument commonly made ers and acquisitions within the 25 coun- for mergers is based on economies of tries of the European Union, encouraged scope, the proposition that related lines of by the single European currency, the deep- mance. One is the ability to place strategic business under the same ownership or ening Single European Market and the en- bets on future markets, such as China, management can share resources and largement of the EU into central and east- without putting the whole bank at risk. create opportunities for one another. The ern Europe. Shareholders may be the more Another is regulatory capture, or the abil- basic economy of scope common to al- easily persuaded because a takeover tends ity of the regulatee to inuence the regula- most all banks is the taking of deposits on to look good at the time. The buyer books tor. The bigger the bank, the more likely its one hand and the making of loans on the the new revenues immediately and cuts home-country regulators and legislators other. The bank gets to re-use its deposi- some overlapping costs. The acquisition will be to take its interests into account tors’ money protably. The skills and in- premium goes straight to goodwill. It is when drafting new rules, and the more formation useful on one side of the busi- only later that you nd out whether the likely they will be to judge it too big to ness tend to be useful on the other side too. businesses are a good long-term t. fail in the event of a crisis. But does the same hold good when a re- And perhaps growth-hungry CEOs are tail bank is paired with, say, a corporate wiser than their students and their critics Wait for it bank, an investment-banking division, a know. The very big banks created in Amer- Not, of course, that banks these days fold credit-card processor, an asset-manage- ica over the past ten years have not been as often as they used to, which is another ment operation, private banking (for rich stellar stockmarket performers recently, reason why strong banks go shopping. people), an insurance business or a foreign but they may just be taking time to bed Weak banks no longer fall into their laps, at branch network? These businesses all down and knit their management and least in Europe and America. Banks fail less overlap with one another to some degree, computer systems more closely together. often, partly because external conditions but so do lots of other businesses. The Their future results may transform the cur- have been kinder. Developed economies fashion for industrial conglomerates came rent wisdom about economies of scale. around the world have become more sta- and went 30 years ago. Will nancial con- Bigness may also have benets not eas- ble over the past 20-30 years, save for Ja- glomerates be any more enduring? The ily captured in studies of nancial perfor- pan in the 1990s.