Consolidation of European commercial and retail banking has been predicted by industry commentators for the past decade. According to conventional wisdom, a combination of regulation and market forces should by now have triggered a wave of rationalisation. There have been some big cross-border transactions, such as ING’s acquisition of BBL and Santander’s of Abbey, but in each case the targets had little or no future as independent entities.
Two events in 2007 should, however, have started a chain reaction: the acquisition of ABN AMRO by the Royal Bank of Scotland-led consortium and the sclerosis in the debt markets that led to the “credit crunch”. The significance of these is that under-performing banks can no longer expect to be protected from takeover by parochial national regulators, and some banks overly reliant on the credit markets will be particularly vulnerable.
While it might interest commentators to speculate whether, when and how consolidation might manifest itself, board members of European banks do not have that luxury. They should be pressing management on whether the bank’s present strategy is fit for purpose. Management should have five priorities:
Clarify roles and accountabilities
Many financial services firms have structures that are the legacy of years of management tinkering. Some tried command and control models, others federal or matrix management models.
Common to all was that with growth came complexity and responsibilities got blurred. Each director became responsible for his/her silo but responsibility for the bottom line was not always clear. To guarantee performance and the survival of the organisation, European bank managers will need to define clear lines of command and responsibilities.
Manage for value
Customers are demanding better service while markets are demanding improved financial ratios and enhanced shareholder value. To satisfy these conflicting demands, without trading them off against each other, banks might look to other industries for inspiration.
One example is the use of Lean methods, which the manufacturing industry has been perfecting for the past 15 years. Lean involves a ruthless focus on satisfying customers and the elimination of waste. If the customer will not pay for it, do not do it.
Sharpen risk-management processes
Part of the blame for the liquidity crunch has been placed on an over-reliance on quantitative risk models that use just a few years of data to measure the risk of extremely complex financial products. While the quantification of risk over recent years has been a positive step, it may have gone too far and a qualitative layer of analysis, based on experience and industry insight, has been lost.
At the same time, banks suffer from not giving risk management its rightful place in decision-making. Too often, decisions are made and the risks only assessed retrospectively. Risk-management processes that highlight critical risks are then ignored or talked down by the business.
European banks have to start taking a more complete approach to risk. Quantitative and qualitative elements should be integrated and risk management made part of the business decision-making process rather than an adjunct.
Take a strategic view
There are thousands of banks in Europe with merger and acquisition (M&A) possibilities. Cross-border alliances and deals mean that formerly improbable combinations are now happening. For example, Fortis could not have taken over ABN AMRO’s retail operations in the Netherlands and Belgium unless it had been allied with bigger banks.
Also, Santander could not have sold Antonveneta, just weeks after getting it from ABN AMRO, to Banca Monte dei Paschi di Siena (MPS). ABN had bought Antonveneta two years earlier, causing the intervention of the European Commission and the fall of the governor of the Bank of Italy. The sale by Santander gave it a £1.7bn profit and MPS great synergy opportunities. Managers must be alert to all kinds of deal and should prepare their organisations to take advantage of the benefits that consolidation can bring.
Establish a platform for acquisition
Mergers and acquisitions help growth, despite the challenges of realising value. European banks must prepare themselves for a possible wave of consolidation.
To become successful acquirers, they should ensure the following is embedded: a long-term commitment to M&A management; development of the skills to control M&A and integration; and the organisational skills to enable integration and post-deal management. In this way banks can improve their chances of reaping the benefits of consolidation.
