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Monday, 7 February, 2000, 11:59 GMT
Banking on size to compete

Banks are increasingly playing the merger card

The NatWest takeover battle is the latest stage in the consolidation of the financial sector worldwide, and the rise of the super-bank.

Battle for Natwest
But big does not always mean better for the banks, or their customers.

One of the driving forces behind the spate of mergers has been the increasing globalisation of the marketplace.

The financial sector, more than any other industry, is affected by the growth of e-commerce - its product, money, is one that can be moved across borders electronically.

BNP was behind Europe's biggest banking merger
The single currency in Europe has also made it easier for international companies to do business across the Continent.

Bank mergers in the US and Europe have been driven by the need for sheer size to be an effective player in the global market.

UK banks, such as NatWest, are big on the domestic scene but relatively small globally, particularly compared with the new breed of superbank being formed by mergers such as Banc Nationale de Paris and Paribas.

As well as speeding the globalisation of the banking market, the rise of e-commerce has given banks scope for major economies of scale.

Internet and telephone banking has eroded the banks' traditional role as a shop-front for borrowers and savers to get together, eating into profits and driving branch closures.

A NatWest merger with one of the Scottish banks would see a decrease in branch activity of about 50% - almost certainly involving some closures - as the two companies can cut areas where their business is duplicated.

It has also seen greater competition, as traditional banks' mortgage and savings business is eroded by newcomers such as Egg and Virgin on the Internet, or supermarket banks.

NatWest has been looking at Legal & General
Banks are looking to expand into other areas of finance to counter this, with the European model of "bankassurance" forming the basis for bids such as NatWest's earlier offer for Legal and General and Lloyds TSB's 7bn acquisition of Scottish Widows.

The banks' substantial customer base provides greater selling potential for financial products which are highly specialised.

The problems for both banks in succeeding in their bids is the low share price in the banknig sector. Unlike the telecoms sector, banks have not been popular recently among investors.

The share price of both RBS and the Bank of Scotland has fallen since their bids were announced, forcing them to increase the cash element of their offer.

Merger concerns

The financial sector has been left behind in the stock boom of the last 12 months.

Those investors scared out of banking shares after getting their fingers burnt in the economic crises in Asia, Russia and South America are simply not returning.

A big merger could work wonders for the stock rating of a company - at least in the short-term.

But there are fears that the creation of superbanks is not altogether healthy.

The reduction in competition does not suggest any immediate benefits for customers, and certainly not for staff who usually make up the first phase of merger "rationalisation".

A study by the influential Bank for International Settlements (BIS) said that the experience of the majority of mergers was "disappointing", with organisational problems almost inevitably underestimated and most acquisitions overpriced.

More worryingly, the BIS report spoke of the creation of banks "too big to fail".

The superbanks' sheer size and unwieldliness can leave them open to complacency and offer no more protection against failure.

However, the failure of such a huge bank would be of such consequence that the host government may be forced to use taxpayers' money to bail out any which got into difficulties

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See also:
24 Sep 99 |  The Company File
NatWest fights 21bn takeover
28 Aug 99 |  The Company File
Plan to create Europe's largest bank fails
20 Aug 99 |  The Company File
Merger creates world's biggest bank
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Why bigger is not always better
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Timing of a takeover