Europe’s banks may need to shrink to cut costs, Barclays says

Posted 4/8/13

LONDON - The European banking industry may have to consolidate further if revenue doesn’t recover and firms don’t achieve their cost-savings targets, according to a Barclays PLC research note.

The German and Italian banking industry looks “ripe for combination” because it’s “highly fragmented,” Barclays analysts Simon Samuels and Mike Harrison wrote to clients Monday. They said large, complex and hostile transactions are unlikely.

“Post crisis, there has been some increase in market consolidation, but many European banking markets remain fragmented,” London-based Barclays said. “Faced with poor revenue prospects, industries often explore M&A as the mechanism to reduce cost bases, and in theory at least banks are no different.”

Banks in the region have been cutting costs by eliminating staff and selling assets to meet tougher capital rules under Basel III international standards amid slower revenue due to the sovereign debt crisis. Lloyds Banking Group PLC last month sold a stake in asset manager St. James’s Place PLC, booking a 400 million-pound ($612 million) gain, while Royal Bank of Scotland Group PLC has said it will sell its U.S. operation (RBS Cititzens) and shrink its securities unit to bolster capital.

“Five years on from the financial crisis, it is clear that banks are increasingly recognizing that any return to meaningful revenue growth is becoming unlikely,” the analysts said.

Samuels and Harrison said HSBC Holdings PLC, UBS AG and Deutsche Bank AG are in the best position to deliver on “very ambitious” cost-saving targets. Financial-services firms in Western Europe have announced more than 342,000 job cuts since the start of 2009, according to data compiled by Bloomberg News.

Investment firm PCP Capital Partners LLP and the Gulf investors it works with are interested in the U.K.’s banking industry despite stricter rules imposed since the financial crisis, said CEO Amanda Staveley.

“I’m always interested in the U.K. banking industry even as it becomes more regulated,” said Staveley, who helped Abu Dhabi invest 3 billion pounds ($4.6 billion ) in Barclays in 2008. “Once everything picks up, retail banking will start to become interesting again. You could see more investors looking at it.”

Staveley, seen as a broker for the Persian Gulf region’s sovereign wealth funds, said any investment in the U.K.’s banking industry would be adapted to the times.

“The U.K. regulatory market has changed, so the style of investment will be different to the Barclays one we did in 2008.” The market backdrop to the Barclays investment was very different from when Staveley and investors looked at RBS a little later, she said in an interview.

Staveley said PCP Capital and Gulf investors are also interested in investing in Russian banks, without giving further details.

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