The changes in the structure of banking are being triggered by far reaching shifts in the international economy, most notably the prospective arrival of the single European currency at the start of 1999 and the globalisation of capital markets. But banks are not just engaged in a search for size. There is also a realisation that the concept of the universal bank - which can provide all manner of services to clients around the world - doesn't work. As the financial markets become more sophisticated and customers require ever more specialist services, the banking market needs to become segmented too. The same banking organisation which can best manage an initial public offering (IPO) for a newcomer to the stock markets, is not necessarily best placed to provide relationship banking services in Frankfurt, Hong Kong and Buenos Aires.
At present much of the merger activity is focused in Europe's heartland of Germany, Switzerland and Austria ahead of currency union. Research conducted by Mori (commissioned by IBM UK) has found that central Europe is both overbanked and overbranched. These three countries represent the most overbanked region in the world with 52 banks for every one million inhabitants. The issue of overbanking is increasingly being addressed by mergers among the central European banks in a move which is likely to be followed by rationalisation of branches, personnel and services.
Among the largest of the alliances is that between Bayerische Vereinsbank and Bayerische Hypotheken-und Wechselbank, Munich-based institutions which have unveiled a plan that should be completed early next year. This will establish a single bank with overall assets of DM743 billion (US$413 billion) and a workforce of 40,000. Despite the merger's potential adverse affect on relationship banking, the Bavarian prime minister, Edmund Stoiber, has approved the merger scheme as a boon to his wealthy state's presence in international banking and its ability to compete with global banks like ABN-Amro, Citibank and HSBC. Trade unions are more cautious, pointing to job losses of 20 per cent and fearing the loss to Germany's Mittelstand - medium sized companies - of the relationship banking which has been at the core of the country's manufacturing success.
The arrival of the euro is also encouraging cross-border mergers in the Benelux countries and Scandinavia and major alliances between German and French banks are anticipated.
The second factor driving bank mergers is globalisation. Banks like London-based HSBC (parent of Hongkong and Shanghai Banking Corporation) and ABN-Amro are determined to extend their reach into new markets like those of Latin America, which are seen to have the greatest growth opportunities. HSBC has recently spent nearly $1.2 billion buying banks in Brazil and Argentina as part of an effort to compete with the US globalised banks like Citibank and Chase Manhattan, which have major operations in the region.
The aim of globalised banks is to be able to offer relationship services to transnational clients, such as Microsoft or American Airlines. In the past such globalised banking activities were severely restricted as a result of national banking regulations and capital controls, but with the opening of financial markets commercial banks have spread to areas which historically were closed.
But banks have had to make choices. Clients - whether individuals on western high streets, businesses seeking a share quotation or transnationals in search of sophisticated currency swaps on the derivative markets - demand ever more specialist service. The same bank which deals with the corner shop, is not necessarily able to meet the requirements of Lufthansa or Deutsche Telecom as they reorganise and broaden their investment base.
Major groups are emerging from this need for specialisation. Lloyds TSB of the UK, once renowned for its global banking in Latin America, has refocused their efforts on becoming a force in worldwide personal banking, offering all manner of services from insurance to pensions. Some of the European banking mergers are specifically designed to equip the banks to provide cross-border personal financial services in the euro area. Another group of investment banks, the so-called 'bulge bracket' which includes Goldman Sachs, Morgan Stanley, JP Morgan, Merrill Lynch and SBC Warburg, are selling the most sophisticated services to the largest corporations. These one-stop investment giants can arrange a $5 billion bond or share issue and trade it, syndicate it, hedge it or distribute it among their fund management clients across the world. They also provide specialist advice and finance for companies considering closer business relationships. However, their interest is limited only to the first rank companies which can afford the enormous fees. Their services tend to be a one-off and are not the stuff of regular relationship banking.
In the case of airlines the globalised banks are essential. They are able to accept payments in Moscow and flash them back to New York electronically at the press of a button, reducing exchange rate risk and improving cash flow. Short-term deposits are held and working capital and investment finance are available from Sydney to London. These banks compete on the finest rates and cooperate in syndicated loans while fighting bitterly for their interest rate margins or spreads.
In the case of the biggest corporations, the competitive shape of new globalised banking can be enormously advantageous. But for second line businesses, including national air carriers, obtaining finance at the best price or first class investment banking advice may be more difficult than ever.
Alex Brummer
Source: Airline Business
