The Rising Titans of a New World Banking Order
A NEW world banking order is taking shape. Many proud, independent financial institutions with century-old legacies are being bought out. With a crisis made in the US and with its roots in Wall Street, the standalone investment banking model seems dead. Only Goldman Sachs and Morgan Stanley are likely to survive, but not before engineering some form of tie-up with a commercial bank.
But US banking is not dead. With more than 4000 banks in the US, consolidation and liquidations on a tectonic scale would still leave sufficient participants to ensure the sector remains lively and competitive.
In Europe, flawed business models are also being exposed. The over-reliance of British mortgage banks on wholesale deposits to fund long-duration assets has seen a virtual wipe-out in the sector. The principal beneficiary has been Spanish giant Banco Santander, which has acquired a 13% market share in the UK home loans market and is now one of Europe’s largest banks by market capitalisation. With many UK banks turning to the government for capital support, it is likely that the government will demand a more supportive role from the banking sector, especially towards small business in future.
Across the channel, the French banks seem set to become the consolidators in Europe, with BNP Paribas already taking the giant step of acquiring Benelux Bank and Fortis after its acquisition of Italian bank BNL two years ago. In other European geographies, many mortgage specialists have come under pressure, such as Hypo Real Estate in Germany. Giant Deutsche Bank has already made its move, absorbing Deutsche Post to provide it access to a retail deposit franchise, but its own capital position remains weak. Nordic banks have loans that are double the levels of deposits on their balance sheets, which puts them at risk if there is a run on the bank.
On the other hand, Asia has so far been spared. We have seen an aborted run on the Bank of East Asia and some concerns in India, where ICICI, India’s second largest bank, suffered from small write-downs, which saw the reserve bank intervene to prevent a run on deposits.
The Chinese behemoths — the largest banks in the world by market capitalisation — have also suffered severe declines in market values but they nonetheless remain fairly immune to the crisis as their lack of sophistication has meant that they shied away from toxic instruments originating from Wall Street. Latin American Banks have remained very quiet so far.
As for South African banks, this crisis may allow Standard Bank to further deepen its emerging markets footprint. The other benefit for South African banks is that we may well see banking skills return to the country as institutions around the world start retrenchment programmes in order to restore profitability.
But fortune favours the brave. Some national champions are likely to emerge as they scavenge on the corpses of failed rivals. JPMorgan in the US has already gobbled up Bear Stearns and Washington Mutual. Bank of America has absorbed Merrill Lynch, providing it with a brand with a global reach. In the UK, Barclays has ventured outside of its territory to pick up assets from Lehman Brothers and Bradford & Bingley.
As already mentioned, Santander is also showing predatory instincts after grabbing ABN Amro’s Latin American operations and a chunk of assets from failed UK building societies. Swiss banks are also in a relatively good position, with strong capital ratios and with well-funded balance sheets. Anglo-Asian Bank HSBC is also weathering the storm well and is likely to emerge as a leading global behemoth.
Of course, such frantic activity is not without risks. Bank mergers — especially across borders — tend to fail. Ask Fortis, which must rue its decision to corner ABN Amro and Royal Bank of Scotland — both victims of the winners’ curse.
Perhaps more unlikely winners will come from the land of the rising sun. Japanese banks are emerging from two decades of hibernation once again to expand their footprint. Japanese banks have relatively low loan-to-deposit ratios and therefore do not face the same liquidity pressure as US investment banks, which has allowed Mitsubishi to come to the rescue of Morgan Stanley. Sumitomo Mitsui has a stake in Barclays and Mizuho took a stake in Merrill Lynch.
It is likely to be a long haul before the global banks are out of the woods. Regulators are likely to get tougher and demand full compliance in exchange for bailing out the sector. But those surviving are likely to become dominant in a sector pruned of major competitors.
I expect JPMorgan and HSBC to remain dominant global banks. Banco Santander is likely to rise to prominence as a household name, especially in the UK market. So forget the Brits, be wary of the European banks as indigestion sets in, and be on the look out for some of the Japanese banks as the banking sector gets a facelift.
# Rassou is senior portfolio manager at Sanlam Investment Management.