What goes around comes around, and banking consolidation is no exception. In the early 2010s there were many government bailouts of banks, and the more questionable business models generally did not survive. FinTechs have in the last few years made such a difference that they have taken market share in many areas once considered pure banking areas. With sluggish growth, restructuring, and general business health figures anything but positive, banks are feeling the pinch. M&A activity is back.
“I’ve never done anything where people were so excited and the response was just overwhelmingly positive.” Marie Ekeland, French Venture Capitalist
European banks seem to be forced into consolidation. Low price-to-book ratios show that the market's long-term confidence in many of the banks is low, at around 0.4 on average. Return on equity is around 4% on average. Both are distinctly lower than US banks, respectively at 1.1% and 8% according to Bloomberg. Stubbornly high cost-to-income ratios do not help either, with Deutsch Bank last year posting 108%, meaning it spent €108 for every €100 of income.
The waves of redundancies over the past few years have made things better, but fundamentally it is a losing game. If the bank's offer is not good enough, or it can be provided better and cheaper by other companies such as FinTechs, then customers will go elsewhere. The problem with large banks is that have been built at a large scale and are by that very fact slow to adapt to changing customer markets. Typically this technological heritage was less visible in countries like Spain who modernized later than European banks in general, and today have cost-to-income ratios of less than the European average of 60%. But it is catching up. In the background lurk technology companies like Google and Apple, who all want a slice of the pie.
BBVA selling its US arm, which we covered recently in our newsletters, is the best example. Two profit-making eBanking units that were created as FinTechs are being closed down by the acquiring US bank. The question is, what will BBVA do with the cash it receives from the sale? We could imagine it will finance more work, or it could decide to acquire a European bank. Consolidation of the European banking market seems a wise move in these times, however every deal might be scrutinized by the EU's competition commission, which aims to stop market dominance and therefore potential for abuse.
Nevertheless, on the purely financial side of a deal, the figures do make sense. Countries like France are notoriously awash with banking branches in every town, and on the backdrop of the 2008 financial crisis, less visibility might be a good thing. Even if an M&A deal of two banking giants such as BNP Paribas and Société Générale happens, there is the bigger question of how they will integrate each other. Our experience at C-Innovation shows that successfully merging two sets of operations, systems, and staff, is always more complicated and protracted than initially expected. That in itself will delay the expected benefits of the deal.