Foreign Banks Eye the Innovative U.S. Banking Market as a Testing Ground

The repeal in late 1999 of the Glass-Steagall Act, which had barred banks, securities firms, and insurance companies from venturing into one another’s businesses, was anticipated to spark a wave of mergers and acquisitions among financial services firms. There had been visions of insurers buying banks and banks buying securities firms dancing in dealmakers’ heads. But those visions never quite materialized – at least not on the scale that had been expected. Sagging stock prices, pressure from Wall Street to demonstrate the ability to grow organically, and growing doubt about whether operating a number of different financial services organizations under one roof is a viable strategy, for the most part have kept U.S. banks looking inward and focusing on cost cutting and building internally. After the abolition of Glass-Steagall it was also expected that some foreign banks, which had been operating the “universal banking” model for quite some time, increasingly would be eyeing U.S. targets, but activity has been rather lackluster. A universal bank provides a wide range of financial services, including retail, commercial, and investment banking services. In some continental European countries, some large banks have combined the roles of commercial banks, investment banks, and insurance and brokerage firms. While big-bucks m&a involving U.S. banks have been scarce recently, a cluster of smallish acquisitions of U.S. banks by foreign buyers have been logged on the dealmaking rolls. And while Michel Driessen, a Partner in Accenture’s Financial Services Practice in London, stops short of calling the bunch of deals a trend, because of the small number of acquisitions and the relatively low dollar value, he does refer to the transactions as an “emerging pattern” driven largely by first-time buyers who want to test the American market. In the past several months, PNB Paribas SA acquired the United California Bank unit of UFJ Holdings Inc. for $2.3 billion; Royal Bank of Scotland Group PLC continued building its presence on the East Coast with its purchase of Medford Bancorp for $273.0 million; Mitsubishi Tokyo Financial Group absorbed First Western Bank in a $44.3 million deal; National Bank of Greece SA shelled out $67.3 million for Yonkers Financial Corp.; Rabobank NV bought VIB Corp. for $212.5 million; and Royal Bank of Canada picked up Eagle Bancshares for $154.2 million. “These deals represent the second wave of activity. Most of these deals are pretty small, and I would put them in the PR deal’ bucket. The earlier deals were bigger and were real let me taste the cooking,’ deals, says Eric Aboaf, a Vice President and Co-Head of the U.S. financial services practice at Bain & Co. In his opinion, this group of recent deals has been prompted by slow market growth in the acquirers’ countries. Limited population growth coupled with very concentrated markets in which the share positions are well staked out, he says. “Foreign banks are starting to look at the U.S. market, which is still fragmented and in which the top player doesn’t have more than a 20% or so market share – not a classic oligopoly like you have in a number of European and Asian countries,” he says. At the same time, notes Alan Gart, who has served as a consultant on the financial services sector and as a professor of finance and business, U.S. banks have been hit hard during the economic downturn and their stocks have dipped anywhere from 10% to 50%, making the U.S. targets attractively priced, he adds. Banks abroad generally have faired better in the past couple of years. An appealing feature of U.S. banks is that they are becoming more open-architecture institutions, which offer both house brands and branded third-party products to customers, says Aboaf. By contrast, many European banks offer customers mostly their own house brands. “A lot of European and Asian banks are addicted to the high margins of their proprietary products, and for them it would be attractive to learn an open-architecture system, where you balance the short-term economics with the long-term customer relationship strength that you are trying to build up,” he states. The ability of U.S. banks to now own other types of financial services companies has made foreign banks’ mouths water a little more, the experts say. Many banks abroad have deep experience in how to run a universal bank. They see an opportunity to bring that expertise to the United States and teach a U.S. bank how to run a universal banking business. That would provide “immediate revenue synergies” for the buyer, says Aboaf. “Some foreign banks are being savvy and trying to see if they can make the universal banking model work on a small scale in the United States. But whether they will be able to convince U.S. consumers to buy auto insurance or life insurance from a bank is another matter. It may look attractive theoretically, but it sends up warning flags because it entails retraining the customer how to buy,” says Aboaf. The U.S. market has always been attractive for foreign buyers, the experts say. It is sophisticated and innovative, and many foreign buyers look at it as a place to experiment and learn, they say. At the same time that overseas banks, particularly European companies, are testing the American market they are making forays into Latin America, says Aboaf. “Some of them have bigger businesses down there than they do at home,” he remarks. In the Latin American markets, he adds, there is more underlying market growth potential than there is in United States, and those are being done to build a global bank that is “capable globally but strong locally.” That, Aboaf says, is in contrast to motivations in foreign purchases of U.S. banks, which “are about learning opportunities and aspirations.” A parallel pickup in foreign takeovers of U.S. insurance companies and asset management firms is also worth noting, says Gart. South African and Australian insurers have been especially active in picking up U.S. asset management concerns, he notes. Aboaf agrees, saying that in the insurance and asset management fields, the deals are “more about becoming a scale player, leveraging the open-architecture environment that is prevalent in the United States, and finding a way to consolidate and grow. You don’t see the INGs and SunAmericas in banking that you see in insurance and asset management.” Is America a market in which global banks need to have a significant presence? According to Driessen, while global asset management and investment banking firms view the United States as market that is critical to their global strategy, in more regional businesses, such as retail banking, the need for foreign banks to establish a presence in the Unites States is not as urgent, he says.