Outlook for '99: Euro threat to UK banks

The view from the business community and the City; Continental rivals say greater preparation for new currency will make them more competitive
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The Independent Online
BRITISH banks face fierce new competition from their continental European rivals in the wake of the launch of the euro, according to European bankers and analysts.

German and French banks, in particular, will use the redenomination of much of Europe's money to compete for higher shares of financial services, ranging from cash management for multinational companies to stockbroking for international fund managers to the core business of lending.

"We've aimed from the start to make our conversion to the euro strategic, not technical," said Hugues Colmant, chief information technology officer of Banque Nationale de Paris, "and we've spent Ffr1.7bn [pounds 200m] on the process."

The creation of a common currency uniting 11 countries from the Arctic Circle to the Mediterranean in a pounds 4,000bn economy prompted continental European banks to rethink their businesses from top to bottom, said Mr Colmant, while British banks have treated the conversion of marks, francs and other currencies into the euro as no more than a shuffling of foreign exchange.

BNP, for example, rebased its pan-European equity research team in London in preparation for the euro. Attaching greater importance to pan-European equity research was a factor in Deutsche Bank's $10.1bn (pounds 6.1bn) acquisition of Bankers Trust, and its London-based equity research team, last month, according to a German banker.

"Eighty per cent of British bank managements' efforts on the euro has been spent on compliance and conversion," said Fields Wicker-Muirin, head of global markets practice at management consultants AT Kearney. "Only 20 per cent has been devoted to the strategic and tactical threats and opportunities."

Ms Wicker-Fields suggests British bankers have adopted a head-in-sand approach to the euro: "Because the City is the largest financial centre in Europe, and because bankers in the City have always prospered in adversity, they think the euro is simply another chapter in the same old story. But this time it's different. Continental banks have been single-mindedly focused on the euro for at least two years. And they have been positioning themselves to gain business with the full support of their governments."

Continental bankers hope to steal a march on the US, Swiss and British banks that have long dominated the eurobond market. As the portion of the approximately 37,000 outstanding eurobond issues denominated in marks, francs and other continental currencies are converted into euros, German and French banks are hoping to pick up bigger shares of both the primary and secondary international bond markets.

As funds round the world denominated in continental European currencies are converted into euros, continental banks are hoping to lower their costs of funds sufficiently to offer cheaper loans to customers.

In response to the expected onslaught by continental rivals, British bankers are dismissing claims from Paris and Frankfurt as marketing hype. "Deutsche Bank in particular has spent huge sums getting ready for the euro and saying that it's getting ready for the euro," said Tony Willis, EMU programme manager at National Westminster Bank. "But I'm not sure what it all amounts to."

In comparison to the pounds 200m BNP says it has spent on preparing for the euro, Mr Willis says NatWest has spent pounds 40m - "although what's a euro spend and what's not a euro spend?"

In a recent piece of research on the euro, Barclays Capital said: "Whilst in the longer term, a single currency will probably mean lower transaction costs and less currency risk for European trade and investments, the immediate impact of EMU will be to raise costs."

British bankers see the advent of the euro as the latest twist in an old story: the consolidation of the banking industry worldwide. They say that whatever the euro brings, British banks are better prepared than their continental rivals for this overarching change.

First, British bankers say, the UK industry has come to terms with a reorganisation - brought by mergers, the demutualisation of building societies, and the emergence of non-bank competitors like Tesco and Virgin - that continental rivals are only beginning to face.

Second, British bankers say, they are more practised at attracting fickle global capital. "The game today is to get a high return on shareholders' funds," said Mr Willis. "I think if you compare British bank transparency with the relative lack of transparency at many continental banks, you'll see we are far ahead at this game."