The competition among European banks to increase market share and profitability reached a new intensity with Germany's Deutsche Bank AG's announcement of large-scale cutbacks in its retail operations.
The impetus is to ensure that they will have the scale and strength necessary to compete in the increasingly unified European Union. An underlying motive, as in the United States, is to make themselves less vulnerable to takeover or to become more aggressive acquirers.
The fierceness of the competition was underscored Tuesday when Deutsche Bank said it planned to close 200 branches and cut 1,200 jobs, or 6% of its staff over the next 18 months. Deutsche Bank also said it would spend more than $260 million to develop direct and Internet banking and brokerage services.
"We need to increase profitability and market share to get economies of scale," said a spokesman for the bank in Frankfurt.
"The pressure on German and European banks to improve profitability is becoming absolutely immense," said Adrian Pilz, a banking analyst at Fox-Pitt, Kelton in London. "We're talking about an enormous change in mentality."
U.S.-style corporate takeovers are hitting European banking and industry. And in Europe as in the United States and Britain, a high stock price is vital if a bank is to avoid being bought out or if it is to buy others out.
"The stakes are getting higher and higher, and banks know they have to either raise profits or risk becoming a target for a takeover," said Mr. Pilz.
Hostile takeovers, or at least attempted ones, are becoming common in Europe and the United Kingdom. France's financial community was stunned last year when Banque Nationale de Paris made a hostile bid to buy Societe Generale and Paribas, two other French banks that had just agreed to merge. A battle is still raging in the United Kingdom with two Scottish banks making competing bids to buy the venerable National Westminster Bank.
Spain's Banco Santander Central Hispano has been among the more aggressive cross-border acquirers. It has bought substantial minority stakes in banks in Portugal, Italy, and France. So has ING Group of the Netherlands, which last month sought to take control of Credit Commercial de France, one of France's biggest banks. Another Dutch bank, ABN Amro NV, has pursued a similar strategy.
Under such pressure, many European banks sense an urgency to make their retail banking systems more profitable. If they can, their profits should improve and, theoretically, their stock prices.
But European banks - and European industry - have been bogged down by regulations that protect employees from layoffs and assure them of rich fringe benefits, including long vacations. Though some European countries - including Belgium, Holland, and Spain - already have taken big strides toward consolidating their banking markets, Italy, France, and Germany have not.
Conditions are particularly difficult in Italy and Germany, where a handful of publicly listed commercial banks operate alongside, and often at a disadvantage to, mutual banks, savings banks, and state-owned regional banks. Not publicly owned, these banks and "near-banks" offer high rates on deposits and low rates on loans that make it difficult for publicly traded banks to compete without severely hurting profits.
"European banks now realize they need to put things in order at home to raise profitability and their stock valuations," said Guillaume Tiberghien, a banking analyst at Enskilda Securities in London.
He and others noted that bank share valuations are still "quite cheap" in France, Germany, and Italy compared with the United States and Britain.
Deutsche Bank has been grasping for ways to boost domestic profits for some time. The move announced Tuesday follows a collapse in talks between Deutsche Bank and its biggest competitor, Dresdner Bank AG, that were aimed at combining their retail operations into a single unit. Only as it became clear that Deutsche Bank would not be able to create a more efficient retail banking business in partnership with another German financial institution did Deutsche Bank decide to go it alone.
"None of the big German banks has good retail operations, but none of them can afford to give them up, because of the related small and medium-sized business they bring in," Mr. Pilz noted.
Setting the stage for the restructuring, Deutsche Bank last year split off its retail and small and midsize banking business into a separate, round-the-clock operating unit known as Bank-24.
"Keep in mind that the three big private banks in Germany don't have more than 15% of the domestic retail banking market, and none of them has more than 5%," said the Deutsche Bank spokesman.
He emphasized that Deutsche Bank, which acquired Bankers Trust New York Corp. last year for $10 billion, is not ruling out the possibility that it might yet join forces with another German or non-German bank or nonfinancial company.
"We're still open to partnerships not only with the banking sector, but other sectors as well," said the spokesman. "This is only a first move, and we remain open to the market to discuss other solutions."
