In a bid to set the cat among the pigeons, The Banker puts forward its top five bets, with the caveat that startling combinations will probably prevail.
BSCH and Royal Bank of Scotland
This would create the second largest bank in Europe by market capitalisation after HSBC. "They are both visionary banks,'' says one analyst. Familiarity has bred a great deal of respect for each other's management. In an interview earlier this year, RBS chief executive Fred Goodwin said the Spaniards had picked up some ideas from a visit to RBS, including a renewed emphasis on cost-cutting. Unlike BSCH's other alliances - Societe Generale, San Paolo-IMI and Commerzbank - this one has already delivered results beyond an appreciation in the value of the 10% stake. BSCH helped the Scots acquire the UK's NatWest by buying £1.7bn worth of new shares, while RBS helped the Spaniards buy Brazilian bank Banespa. (BSCH and SocGen's relations have reportedly deteriorated following last year's announcement of a series of joint ventures).
Both BSCH and RBS have accustomed shareholders to high returns through organic growth and acquisition. Although BSCH is absorbing Banespa, while RBS is absorbing NatWest, this should be accomplished within the next year and a half. In addition, the big Spanish banks are well managed (BSCH and BBVA), with the capacity to digest big acquisitions rapidly and well, says Carlos Pertejo, an analyst at JP Morgan Chase.
Angel Corc-stegui, chief executive officer of Spain's largest bank, told The Banker recently that "the managerial depth of this group is our best point". He also said that the first phases - Iberian consolidation and Latin American expansion - are now over for the bank and the next phase from 2002 is "perhaps Europe".
Consolidation in Spain and the UK has run its course for both banks due to their domestic market shares. Although RBS's Mr Goodwin insisted earlier this year that the bank's European strategy consisted of less ambitious moves than full mergers ("I do not see us wandering out and buying SocGen") if another entity moved, this would probably spark a reaction. "The first major cross-border merger of equals will trigger an avalanche," says Andy Maguire of the Boston Consulting Group.
How much synergy can be found in the merger of BSCH and RBS? Arguably, this misses the point. On average, only around 8% of costs can be cut through cross-border deals, say consultants. As for added value: "You want to talk about the added value in cross-border banking deals?'' asks one analyst. "You actually mean value-destroying."
Although this may be an excessively cynical interpretation, the impulse behind the mergers - the advent of the euro, the move towards a single market in financial services in the European Union and flattening growth in domestic markets - will not go away. Unquantifiable factors, such as the chemistry between the heads of financial institutions, is also set to play a major role. In this case, it could be the clincher.
Deutsche Bank and Axa
The insurance giant is missing a leg - calling itself Europe's largest insurer without a proper presence in the EU's biggest economy. "A move into Germany is a must for Axa and there are few parties other than Deutsche," says one investment banker. Meanwhile, after the all-German merger of insurer Allianz and Dresdner Bank, Deutsche Bank is looking lonely and most domestic possibilities have been explored.
Also, Axa's shareholders are among the few who might support the move, say analysts. Investors generally buy insurance company shares for growth and they do not want it flipped into a bank's stodgier growth. What might be awkward is the location of the headquarters. "The lesson of BCCI was that every bank has to be located somewhere. Every international bank has to have one headquarters and one consolidated supervisor," says Sir Howard Davies, head of Britain's Financial Services Authority. "Some of the ideas floated for cross-border mergers within Europe have failed to recognise this.'"
Specifically, British building society Alliance & Leicester and Bank of Ireland reportedly attempted to convince regulators of the need for a dual headquarters at the time of their failed merger talks in 1999, the main impulse being the need to continue with the myth of a merger of equals. However the absurdity of such face-saving measures is apparent, for example in the merger of Bank of Scotland and Halifax, where placing the headquarters in Edinburgh is a sop to the Scots since management power will be in the hands of the mortgage bank's executives.
Deutsche's management did try to get out of retail banking last year, but its strategy seems to have changed, the emphasis now being on both investment banking and asset management. There would be a multitude of cross-selling synergies with Axa. And, with Axa's shares at a 12-month low, it will come up on top.
Lloyds TSB and Commerzbank
The German retail market is not attractive for English banks. The returns are lower in Germany. The retail market is fragmented. These undisputed facts, however, do not detract from the fact that it is too important a market to ignore. Also, culturally, it could be argued that a northern European mix would be easier to implement than other possible European combinations.
Lloyds chief executive Peter Ellwood told The Banker last year that it had "run a sliderule over virtually all European banks and we have had conversations with players in Europe... We have set no time limit." The fact that Lloyds awaits a decision on its bid for building society Abbey National, due this month, does not mean it has stopped exploring foreign shores. Commerzbank, meanwhile, has been at a loose end after its plans for a merger with Dresdner Bank last year collapsed.
"Its latest results were terrible and it lacks strategic definition," says Jose-Ram-n Contreras, an analyst at BSCH. "But it has a competitive advantage in medium-sized companies." This could be of interest to the UK bank. When it comes to structuring the deal, or any cross-border banking deal, there can be problems, with the mixture of euro and non-euro complicating the issue even more. German pension funds will not necessarily want to increase the foreign component of their investments by accepting a UK bank's shares. "The ability to offer shares in a cross-border merger needs to be considered carefully in the context of the aspirations of both groups of shareholders to prevent flow-back," says Malik Karim, managing director of the financial institutions group at Credit Suisse First Boston.
At least a UK/Germany deal might have an easier ride with the regulators than, say, a German-Italian deal. "I assume UK and German regulators will be relatively open. When it comes to French or Italian banks, the headquarters had better stay in Paris or somewhere in Italy," says John Leonard, European bank analyst at Schroder Salomon Smith Barney.
Another possibility might be Italian insurer Generali, which has been looking in the UK and not taken the plunge, say bankers. A Generali/Lloyds combination would then be well placed to develop opportunities in Italian banking once the local regulators allowed it.
BBVA and ABN Amro
Frustrated in its Italian forays, BBVA is facing a change in its top management as long-standing co-chairman Emilio Ybarra retires. Meanwhile, ABN Amro, like its home rival ING, is too big for the Dutch market and too small for Europe. It was reportedly frustrated in a couple of French deals, and has been looking for a partner in insurance in Asia and the US.
But BBVA could be a better geographical bet, increasing the bank's European exposure, as well as a being a better strategic option. "Ideally, financial institutions would be looking for some complementarity," says Mr Maguire. In this case, ABN Amro's investment banking complements the lack of it at BBVA, both in Europe and in Latin America, and would give it critical mass.
In addition, once the Italian authorities are satisfied that a national champion or two has been created via domestic mergers, a couple of years from now the enlarged BBVA group could once again venture into Italy, rather more successfully.
BNP Paribas and Standard Chartered
France is in for a hot summer with a possible listing of Credit Agricole and the end of Credit Lyonnais's shareholder pact. There will probably be some activity between these two and Societe Generale.
But it is not obvious that BNP Paribas will want to get involved. The merger between Banque Nationale de Paris and Paribas two years ago has gone well, and increasing the bank's exposure to the French market would make little sense. Instead, it could increase its limited international exposure (it is increasing its stake in BancWest in the US) and increase its growth rate by buying Standard Chartered, the UK-headquartered emerging markets bank with exposure to Asia, the Middle East and Africa.
The bank is well run, having gone through tough times in Asia, and emerged on top. In the last year, it bought Grindlay's operations in India, Chase Manhattan's Hong Kong retail bank, which lessened its dependence on mortgages in the territory, and introduced a productivity programme.
A number of analysts are recommending the bank as strong buy to their clients and BNP Paribas might take heed of this. The acquisition would not involve disruptive merging, being run instead as a separate unit, allowing managers who know how to deal with those markets to get on with their jobs. Yet the impact on BNP Paribas's bottom line would be considerable.
If the French bank does not take up the challenge, behemoth Citibank has also been rumoured as a candidate. It would fit in with the US bank's vision of itself as a global consumer bank, while duplication in a number of regions could lead to savings from cost cutting. The bank has certainly proved itself still hungry for acquisitions, having just bought Banamex, Mexico's second largest bank.
Merger merger everywhere
A number of factors will make a cross-border merger between major banks in core European countries happen faster. These include a continued deceleration in the EU, where worsening bank results will force them to take action, while a stockmarket in the doldrums will make acquisitions cheaper.
There is also the advent of euro notes and coins, the harmonisation of accounting standards in the EU by 2004, and a successful bid by a rival, or in fact any other major European bank, since there are a limited number of interesting options available.
And, ultimately, there is what makes or breaks mergers, which is a good relationship between the head of the banks. "We analyse everything with impeccable economic logic and you then have an unexpected combination because the top executives have decided how to divide up the power," sighs an analyst.
The Banker waits with bated breath.
