The most profitable financial service companies in the world tend to be in deregulated markets like the United States, excel at either product innovation or cost management, and are something other than traditional banks.
Confronted with these findings from an Andersen Consulting study, a U.S. commercial banker might say, "Two out of three isn't bad."
But being from the United States might carry the most weight of all- enough to overcome the "bank handicap."
In terms of revenue and profit growth and total returns to shareholders over 10 years, U.S. financial services companies-banks included-are pretty much on top of the industrialized world.
That puts them in the best position to build on their strengths as the business becomes increasingly homogenized and globalized, said Andersen Consulting. But the globalization phenomenon, though much discussed, is hardly evident and may be awaiting further consolidation and innovation within and across borders.
Among the high-performers to watch, based on the study, is Travelers Group. With its recent agreement to merge with Citicorp, Travelers is living up to Andersen Consulting's earlier characterization of it as "the consummate consolidator."
The firm's study of "value capturers," the international extension of a performance yardstick applied last year to the United States financial services industry, provided "the first proof we've seen that deregulation leads to higher returns to shareholders," said managing partner Michael J. May.
"The more competitive markets have bred a stronger breed of competitor," said consultant Brian A. Johnson, who analyzed the results.
Strong performance correlated most closely with the openness of markets. The U.S. financial companies' growth in shareholder returns was the best of the 17 countries studied-11.3% a year from 1987 through 1996.
The United Kingdom registered 10.4%, Australia 7%. Other major countries were either marginally positive or in negative territory, with Japan at minus 4.9%.
Profit growth in the United States was a world-leading 21.3%; the similarly deregulated U.K. market was 15.7%; others in Europe were 10% to 12%; and troubled Japan was a starkly negative 21.4%.
"Consolidation in the U.S. paid off handsomely for investors," said Mr. Johnson, who is based in Chicago.
"We see in Japan parallels to the U.S. around 1989," he said, recalling a previous real estate-induced crisis. "The lesson is that all asset growth is not created equal, and all revenue growth is not necessarily good."
Japanese institutions' 10-year revenue growth rate was 5.5%, about equal to that in the United Kingdom, but the bottom-line result was directly opposite.
Andersen placed the United States, United Kingdom, and Australia in a first wave of deregulation that is beginning to show ripple effects. Italy and Spain are examples of countries in transition. Japan, Germany, and France have longer distances to travel.
Financial services executives in latter-wave countries "need to understand lessons learned from deregulated markets," Mr. May said. He said there are signs in continental Europe that bankers and others are breaking out of a tightly regulated, utility mentality and paying more attention to rewarding shareholders.
Mr. May cautioned that "few in Japan see beyond their short-term problems to the need to compete for capital in a global market."
Andersen gathered and analyzed performance data on 251 companies in 17 industrialized countries. In the mix were 143 banking companies, 80 insurers, and 28 other monolines or specialists. The country distribution: United States (101), Japan (39), Germany (24), United Kingdom and Ireland (23), rest of Europe (60), and Australia (4).
Each company had at least $1 billion of market capitalization as of 1992, but Andersen lowered the threshold to $500 million so that smaller markets such as Portugal could be represented. All growth rates were adjusted for inflation, and shareholder returns were put on an even footing by measuring changes against local market indexes.
As in its 1997 report on the U.S. market, Andersen mapped the industry on a four-part grid. Companies with annual revenue growth exceeding 9.6% but posting returns to shareholders below 4.9% were classified as "empty growth." Those above both the 9.6% and 4.9% lines were the elite "high- growth value capturers"-a group including Travelers, Charles Schwab & Co., NationsBank Corp., State Street Corp., and Washington Mutual Inc.
Companies with shareholder returns under 4.9% and revenue growth less than 9.6% were deemed "stalled businesses." The slow-growers that managed to surpass 4.9% returns were called "low-growth value capturers." These included Barclays PLC, Foris, Household International, Merrill Lynch & Co., and a host of U.S. depositories such as BankAmerica Corp., Citicorp, Golden West Financial Corp., Huntington Bancshares, Mellon Bank Corp., Mercantile Bancorp., and Wells Fargo & Co.
Andersen did not disclose names of the stalled and empty-growth companies, but they were numerous and must "start executing change journeys to break out new value," the firm said.
Two-thirds of those surveyed fell in one or the other of the lower groups. Banks were right on that average, but the insurance company percentage was 73%, the specialists', only 54%.
Almost one out of five of the 143 banks was a low-growth value capturer, one out of six a high-growth value capturer. Eight of the 28 specialists, or 30%, were in the latter category.
The specialists' overall return to shareholders, 13.7% over 10 years, well exceeded insurers' 5.6% and banks' 5%.
Mr. May and Mr. Johnson described three formulas for success:
Innovators, which "develop unique value propositions in attractive product/market segments." Charles Schwab meets the definition in discount brokerage.
Consolidators, which "focus on opportunities to restructure and dominate the industry." Travelers is the "archetype" as it crosses industry lines, the consultants said. Another example was Lloyds Bank of London, which, among other things, successfully integrated an insurance company in 1990 and took full cost-reduction advantage of its 1995 merger with Trustee Savings Banks to create Lloyds TSB.
Optimizers, which "focus on opportunities to improve performance of existing operations." Institutions like Barclays that made judicious staff cuts and improved efficiency fall into this category. Wells Fargo and U.S. Bancorp, then First Bank System Inc., took optimization steps in the 1980s and early 1990s that paved the way for solid growth.
Mr. May said the performance gap is widening between the best value capturers and the stalled businesses. Though the latter become vulnerable to competition and takeover, the leaders are more able to push the growth and innovation levers.
It remains to be seen how global a given institution can become. Mr. May said Andersen plans to track that possibility in a study on "globalizers." But he sees U.S. and U.K. companies-perhaps Merrill Lynch, Mercury Asset Management, the new Citigroup-"having the capital to go in and dominate certain markets. They could not do that without being value capturers."
Another consultant who has given international comparisons and globalization a lot of thought, Gemini Consulting vice president Karen Wendel, said she fully concurred in Andersen's views on U.S. banks' strengths. Those that have done well, whether in retail or wholesale niches, exported skills and expertise from their home turf so effectively that entrenched local competitors had to play catch-up.
But Ms. Wendel questioned whether historical performance data are the best indicators of future preparedness. Because global reach, scale economies, and payment infrastructures will become essential, she said, Bank of New York Co., Norwest Corp., and other regionals must not rest on their laurels as high-growth value capturers.
"They may be big banks, but they will be limited by the geographies they are playing in," Ms. Wendel said. "As they bump into regulatory and geographical barriers, we will see some intriguing combinations." u
