Across The Border
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European banks in search of a reason for being

Lenders in Europe facing trouble at home are taking different approaches as they look to the East

PUBLISHED : Sunday, 09 October, 2016, 9:01pm
UPDATED : Monday, 10 October, 2016, 3:08pm

European banks facing challenges in their home markets are adopting different strategies in Asia. Many have withdrawn from markets or product areas, with analysts expecting further cuts to come, while others see Asia as offering an opportunity to develop growth.

This week, the International Monetary Fund called for “urgent and comprehensive action” to resolve the difficulties in European banks. “Many European banks continue to struggle with still-high levels of impaired assets and low profitability,” the organisation added in its global financial stability report.

Deutsche Bank is generating the most headlines as its share price rises and falls based on speculation as to the size of its fine from US regulators, which may be as much as US$14 billion, for mis-selling mortgage-backed bonds, but many banks are cutting jobs in Europe, with announcements last week from Commerzbank of Germany and Dutch banking group ING among the latest.

For a big global bank, there is little point being a minor player in retail banking in a market
Charlie Alexander, EY

Banking difficulties are not limited to Europe, however, and even the big Chinese state-owned banks reported near-flat profit growth for the first half of this year.

However, European banks in Asia are less well-off than some of their overseas competitors. “An advantage the US banks in Asia have over the Europeans is that in their home market things are looking up a bit,” said Claudio Lago de Lanzós, a partner at consultancy Oliver Wyman.

“European players in Asia are reacting differently to this. Some look at the region as one of their key growth engines, and are doubling down on places like China for example, while others are starting to retrench from Asia-Pacific due to the strong cost and capital pressures.”

In the wealth management sector, this year, Barclays sold its Asian unit to Oversea-Chinese Banking Corp, and Societe Generale sold its to DBS in 2014, while others are expanding their activities, both in Hong Kong and mainland China.

On the retail side, Standard Chartered has sold its retail banking business in the Philippines to local bank EastWest, and HSBC Holdings has trimmed its operations in India and will shutter 24 branches in 15 cities this autumn, though it is continuing to invest in its push into the Pearl River Delta.

“Retail banking requires a scale play. For a big global bank, there is little point being a minor player in retail banking in a market,” says EY’s global banking leader for transaction advisory, Charlie Alexander. “I would anticipate that there are more exits from retail operations to come.”

Investment banking is another area where banks are coming under pressure and particularly facing competition from local players.

“The large global banks have been letting people go in their equity capital markets teams in Hong Kong while Chinese banks have been hiring ,” said John Mullally, director of Hong Kong financial services at Robert Walters.

“Also, on the M&A side, global banks are struggling with pressure from Chinese banks as [state-owned enterprises] tend to prefer to use Chinese banks partly for patriotic reasons.”

For the first nine months of this year, six Chinese banks were ranked in the top 20 in Asia for M&A advisory, according to data from Mergermarket, compared to none for the same period in 2015.

Alexander dates European banks’ divestment of units back to the financial crisis.

“A lot of European banks needed state aid, and the deals they struck with the regulators were that to receive this aid they had to get rid of some assets,” Alexander said.

“Before the crisis, a number of banks had a flag planting strategy. The goal was to be in a lot of Asian markets, even if not as a top five player, and they could achieve this by holding a lot of capital at the centre. Now, regulators have said ‘if you have a bank in our market, you have to have enough capital for it’, and with greater capital requirements from the Basel III regulations, capital has become a precious resource. Banks have had to consider whether units are generating enough profit for the capital they require.”

This means a number of banks are trying to identify their core operations as they do not have the capital capabilities to operate in every market or product area.

Credit Suisse, for example, with a background in wealth management, is expanding in this segment in Asia.

Other European banks are looking to expand their transaction banking and trade financing operations in Asia as their global reach allows them to offer services that their local competitors cannot.

Lago de Lanzós said there might even be some new players on the way.

“We hear that some of the European banks that are not really in Asia in any size are looking to develop their activities in Asia. This is the first time for a while when we have seen such different strategies from banks,” he said.

Whether European banks can justify their capital in the region is yet to be seen.

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