Universal Banking questioned

April 28, 2009

CITIGROUP/(From Acquisitions Monthly)

The coming financial services new world order could unleash a wave of mergers and acquisitions as providers look to thrive under a regime of tighter regulation and diminished risk appetite. As such, the IBM Institute for Business Value calls into question some of the ideological shibboleths still held by many senior banking executives.

Whilst banks such as Citigroup, UBS and the UK’s Barclays cling to the notion of universal banking – effectively one stop shops – research by IBM argues that this particular model may not be fit for purpose anymore. The days of soaring profits from what it calls “pockets of opacity” such as over the counter derivatives are over.

“Some of the largest institutions may be required to downsize or dispose of business lines,” says IBM.  It predicts that outperformers will become much more specialist and aligned with their customers’ needs. Many universal banks were found to be more self-serving in outlook. “On average the specialists have seen their revenues grow 30 percent more than the universal banks and enjoy operating margins of 25 percent compared with the 16 percent universal banks command,” says the IBM Institute.

It sees the industry splitting into three segments: The first are utilities providing infrastructure to facilitate capital allocation and relying on economies of scale to drive down costs. The second are those that give advice such as wealth management firms and boutique M&A advisors. The last category, are those geared to investment outperformance such as private equity groups and hedge funds. Barclays for example might inadvertently be contributing to this trend with its disposal of passive fund manager, iShares for 3 billion pounds ($4.3 billion).

Basically the IBM Institute is suggesting there could be more disposals to come from the universal banks as the market forces them to streamline or investors seeking higher returns demand it.

Banks such as Barclays also face growing competition in retail banking with the likes of giant retailer, Tesco, planning their own banks. Their offerings threaten to be much more customer-centric and this will force the traditional banks to rethink their approach and as IBM predicts, possibly to specialise.

Reporting by Justin Pugsley, Acquisitions Monthly

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Deals of the Day:

* German insurer Allianz and U.S. credit card group American Express raised a combined $1.9 billion on Tuesday through the sale of share’s in Chinese banking giant ICBC.

* Japan’s Toshiba said it would set up a joint venture with U.S.’s Amkor Technology and Japan’s Nakaya Microdevices in October to assemble system chips. Toshiba, Japan’s biggest chipmaker, said the outsourcing move would help improve earnings in its battered chip business.

* Sumitomo Mitsui Financial Group has agreed to buy Citi’s Japanese retail brokerage and part of its investment banking operations here for more than $5.2 billion, sources said

* Qatar is in talks to buy a stake in Germany’s Porsche and may also invest in other carmakers as the Gulf gas exporter looks to park some of its sovereign wealth abroad, according to media reports.

* German Economy Minister Karl-Theodor zu Guttenberg is meeting senior representatives of Magna to discuss a possible investment by the car parts supplier in Opel, a unit of General Motors.

* Consumer goods exporter Li & Fung, which manages supply chains for retailers such as Wal-Mart and Target, expects to sign more outsourcing deals within months as cash-strapped retailers in the United States look to cut costs in the economic downturn.

(PHOTO: Flags fly outside the Citigroup headquarters in New York, November 24, 2008. REUTERS/Brendan McDermid)

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