Deutsche Bank forces rivals to choose

By David Clarke

PARIS (Reuters): Deutsche Bank AG's takeover of Dresdner Bank to form the world's largest bank will force top banks in other European countries to decide which way they want to go when Europe's banking borders fall.

In itself, the German merger has done little to change the European banking landscape. Deutsche was already the leading European investment bank, one of the few able to compete with the U.S. behemoths. It is now even bigger.

At the retail level, Germany's private banks were far behind in terms of consolidation, market share and profitability. Deutsche's decision to shut down 800 branches and push retail banking towards insurer Allianz is more a reflection of domestic weakness, analysts say.

"This is not about the Internet in Germany, it's about the European league tables. Dresdner was simply too small and has fallen into Deutsche's arms," said Keith Baird, banking analyst at Enskilda Securities in London. "This is about strategic positioning ahead of the cross-border phase of mergers."

Analysts said the merger will pressure big domestic players such as France's BNP Paribas to decide what kind of institution they want to be when Europe eventually turns into a single banking market -- an investment or a retail bank.

"If they have real ambitions to develop, banks will no longer be able to split their equity capital 50/50 between retail and investment banking," said an analyst at a large European bank who declined to be quoted.

"If a bank has investment banking ambitions, the only way to face up to them is to free equity capital. Deutsche Bank is the first to take on the consequences of that," he added.

Germany's biggest bank Deutsche said earlier on Thursday it was buying the country's number three Dresdner, slashing staff and shifting out of unprofitable retail banking. The new bank will be the world leader with combined assets of US$1.2 billion.

Jean Peyrelevade, chairman of France's third largest quoted bank Credit Lyonnais, outlined the strategic problem facing Europe's banks this week. He said only Deutsche, and perhaps UBS and Credit Suisse, could compete with the U.S. investment banks.

He said the large U.S. competitors have two big advantages -- their huge domestic market, which is an ideal market for placements, and a true pan-European approach.

An analyst at a German bank, who declined to be named, said banks with more second division investment banking operations -- he cited ABN Amro, BNP Paribas and Societe Generale -- now had to take a serious look at their strategy.

Lyonnais' Peyrelevade said the issue of whether to develop investment banking was less of a problem for most British, Spanish and Italian banks simply because they were no longer -- or never were -- involved in international corporate banking.

As for Lyonnais, he said: "We are giving ourselves a year to 18 months to take a decision."

Analysts said, however, that while the Deutsche merger may accelerate banks' reflections, there was little danger from the German powerhouse for now. It needed time to digest Dresdner and its investment banking arm Dresdner Kleinwort Benson.

That new challenge comes after Deutsche consumed Bankers Trust in the United States and Britain's Morgan Grenfell.

Analysts said Deutsche's retail bank reassessment would not lead to much fallout in other European countries as other large national banks tended to have more profitable retail networks, bigger market shares and were already forging online ventures.

BNP Paribas, for example, posted a pre-tax return on equity from its retail branch network of 19 percent in 1999 and has an 11.5 percent share of retail loans. Pascal Decque, analyst at CDC Bourse in Paris, said Commerzbank, Deutsche and Dresdner combined would still fall short of that.

Meanwhile France's mutual bank Credit Agricole, the country's largest measured by equity capital, is trying to weave retail partnerships outside its national borders, notably with Italy's biggest bank Banca Intesa.

Decque said Deutsche had to redefine its strategy as it was too late to follow British or Spanish banks and develop virtual banking on the back of profitable retail networks.

And while analysts agreed that the Internet will lead to widespread changes in the way banking services are sold -- notably by cutting margins -- most European banks have strategies in place, even if French banks trail their British, Spanish and Nordic counterparts.

Decque said a bank like Spain's BSCH, which has a large chunk of domestic retail business, had already taken a decision to pursue a retail expansion outside its own borders, using European partnerships and its Latin American presence.

BSCH, which has sizable stakes in Royal Bank of Scotland and Societe Generale, has bought Latin American financial portal Patagon.com while rival BBVA has formed an online bank, Uno-e, with Terra Networks.

Analysts were all agreed on the most immediate fallout of the Deutsche merger -- Germany's fourth-largest bank Commerzbank will now come under pressure.

As the analyst at the German bank said: "Europe's rich banks -- HSBC, Lloyds TSB, ING, Rabobank and ABN -- will be looking very closely at what's left in Germany."