Sir,
While overall mergers and acquisitions activity has turned down in the last half year ('Deal volumes suffer sharp fall', December 21), it seems to us that, against the trend, activity will actually markedly increase in the European banking sector during 2008.
Retail bank share prices have been driven down, some much more than others, as shareholders are less than sanguine about future earning prospects. This differential scepticism is underpinned by some quite distinct concerns: shareholders doubt the viability of some business models (for example, an emphasis on mortgage securitisation, particularly in the face of more stringent regulatory liquidity guidelines); they judge that risk assessment and management practices are not fit for future purpose (for example, risk is neither properly understood nor appropriately measured and risk management processes are an adjunct to the business decision-making process); they doubt the competence of incumbent management to identify and chart a safe course, possibly particularly in businesses that compete in quite different markets (for example, some banks are imbued with complexity, as well as tortuous and ineffective reporting lines, by virtue of their business scope).
Individual banks will strive to rebuild shareholder confidence. But some will be more equal to the task than others. Many of those that are particularly successful will become predators, with the prey those institutions that have been unable to dispel shareholder scepticism, whatever its root cause. And the investment bankers, driven by self-interest in the 2008 bonus year, will go to extraordinary lengths to 'lubricate' the market for retail bank assets.
This is something retail banks, whether they see themselves as predators or prey, will debate in board meetings early in the new year, if for no other reason than the non-executive directors insist upon it.
Jeremy Stanyard, Carlos Perez-Palacio
PA Consulting Group
London SW1W 9SR
