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FOCUS: Europe’s Banking Sector Poised For Further Shakeup

Oct 6, 2008 Market Outlook

PARIS (Dow Jones)–The European banking sector continues to be reshuffled at
breakneck speed, as several household institutions either fall into the hands of
more powerful rivals or are being nationalized by their governments.

While the dust hasn’t settled yet, a handful of banks seem to be benefiting from
the current turmoil and are emerging as winners: HSBC Holdings PLC (HBC), Banco
Santander SA (STD) and BNP Paribas SA (13110.FR). In particular, Santander and
BNP Paribas have demonstrated that they could benefit from the current malign
environment and buy prized assets at bargain prices.

Bankers and analysts said they expect more large-scale deals in coming months, as
liquidity concerns persist and force more sales or create acquisition
opportunities for banks with stronger balance sheets and who want to belong to
the top tier of European banking.

“I think there will be a class of survivors, probably emerging fortified, even
from this crisis: large banks with big, liquid balance sheets and diversified
business models,” Dresdner Kleinwort analyst Arturo de Frias said.

The latest in a string of sector-altering deals came from BNP Paribas, France’s
largest bank by market value, which Monday confirmed it had agreed to pay EUR14.5
billion to acquire parts of Belgian-Dutch financial services group Fortis NV
(30086.AE), confirming its status as having better withstood the impact of the
credit crisis.

The Paris-based bank will acquire a dominant position in Belgium and Luxembourg,
two affluent Western European markets, in both banking and insurance. In
addition, BNP Paribas becomes the biggest euro-zone company in private banking,
with around EUR214 billion in assets under management, and the fifth-largest in
assets under management with around EUR549 billion.

The newly created, West European banking behemoth will also add sizable retail
operations in Poland and Turkey to its presence in the wider Mediterranean
region, including Italy.

But the creation of such banking giants, though resolving the immediate problems
faced by some troubled European banks, could entail some long-term risks,
analysts cautioned.

“The concentration trend that we are witnessing in the banking industry raises
some serious concerns for the long run,” said Axel Pierron, an analyst at
Boston-based research firm Celent.

“If only a few gigantic universal banks emerge from the current market turmoil,
the systemic risk could greatly increase and the next crisis could be
cataclysmic,” Pierron said.

For now, however, European executives and politicians are focused on trying to
restore some confidence in a number of domestic players.

In Germany, Hypo Real Estate Holding AG (HRX.XE) secured a new bailout plan. In
Italy, UniCredit SpA (UCG.MI) launched a capital increase and in Iceland the
government is seeking new capital for its banks. This follows earlier government
interventions into the Irish banking system and a rescue effort for
French-Belgian bank Dexia SA (DEXB.BT).

Fortis, too, held high hopes of belonging to Europe’s top division. But the steep
ambitions of Chairman Maurice Lippens, which culminated in the pricey EUR24
billion acquisition of ABN Amro assets last year, ultimately led to his company’s
downfall.

Analysts don’t count Swiss giants UBS AG (UBS) and Credit Suisse AG (CS) among
Europe’s winners. UBS’ private bank is in for more pain because of $42 billion in
mortgage write-downs, as its investment bank is restructured and shrunk down.
Both banks in addition face regulatory crackdowns on offshore banking -
traditionally big business for Swiss banks - which translates to pressure on
their business models.

RBS, Barclays On Edge Of The Top Ranks

Alexander Potter at Collins Stewart would add Royal Bank of Scotland Group PLC
(RBS.LN) and Barclays PLC (BCS) to the list of potential beneficiaries of these
uncertain times: “They (RBS, Barclays) are number 10 and 11 of the biggest banks
in Europe, so we shouldn’t write them off.”

“Clearly, there is a premier league of the three names (BNP Paribas, HSBC,
Santander), but RBS and Barclays are only a little bit smaller than Intesa
Sanpaolo at number four,” Potter said.

“Ultimately, RBS and Barclays are key players in the market too and will continue
to be so,” Potter said.

As BNP Paribas made its big move, some of its nearest peers may reconsider their
acquisition strategy.

“Yes, Societe Generale (13080.FR) may be next in looking for a big acquisition,”
a Paris-based analyst said. Its chief executive, Frederic Oudea, over the weekend
told a French paper that the group is solid and ready to consider acquisitions
again.

Some analysts, however, expect France’s second-largest bank to continue to focus
on strengthening its internal control systems, a result of the trading scandal
earlier this year that for a moment jeopardized the bank’s independence.

Dexia, a French-Belgian bank, has been suffering in the recent weeks, prompting
concerted action from three governments to stabilize the firm. If the problems
were to persist at Dexia, potential buyers may want to make move.

Further in France, the newspaper Le Monde reported that two major mutual banks,
Caisse d’Epargne and Banques Populaires, are mulling a merger. Caisse d’Epargne
declined to comment.

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Technorati Tags: Acquisition Opportunities, Assets Under Management, Banco Santander, Banking Sector, Bnp Paribas, Bnp Paribas France, Breakneck Speed, Business Models, Credit Crisis, Diversified Business, Dominant Position, Dow Jones, Dresdner Kleinwort, European Banking, Financial Services Group, Hsbc Holdings, Hsbc Holdings Plc, Mediterranean Region, Retail Operations, Western European Markets

Tags: Acquisition Opportunities, Assets Under Management, Banco Santander, Banking Sector, Bnp Paribas, Bnp Paribas France, Breakneck Speed, Business Models, Credit Crisis, Diversified Business, Dominant Position, Dow Jones, Dresdner Kleinwort, European Banking, Financial Services Group, Hsbc Holdings, Hsbc Holdings Plc, Mediterranean Region, Retail Operations, Western European Markets