Three big banks run into rough weather

Interesting. Three of the world's top banks have run into rough weather. HSBC is having to cope with the problems created by its acquisition of a mortgage finance company in the US (See my post, Shocker from HSBC, March 8). Rising defaults in the US sub-prime market have caused HSBC to issue its first profit warning in decades.

HSBC is in good company. Citigroup's CEO, Chuck Prince,has been facing flak for sometime thanks to the stock's underperformance for the past five years. Citigroup, the world's biggest bank, has faced regulatory problems in different parts of the world and tightening compliance has been one of the priorities for its CEO. Most recently, it has faced a probe by the SEC regarding tax matters related to one of its acquisitions.

Under Prince's charismatic predecessor, Sandy Weill, Citigroup powered ahead through a series of acquisitions.Digesting those acquisitions has proved a problem for Prince. So, he has focused on growing the bank organically. For a bank of Citigroup's size, this is not easy. Citigroup's growth must come from its international operations- Prince wants to raise the share of international revenues from 45% to 60%. But this must be done without inviting fresh regulatory problems.

Citigroup's latest gamble is the planned acquisition of Japanese broker, Nikko Cordial, a firm that is caught in an accounting scandal. At twice the book value, Citigroup will pay through its nose. Besides, Citigroup and other foreign banks have had regulatory problems in Japan. Citigroup's readiness to plough ahead is a measure of its desperation to produce results.

Elsewhere, Dutch bank ABN Amro is facing demands from a leading hedge fund investor to get its act together. ABN Amro again has to sought to grow through acquisition in Europe but it is having problems with its purchase of an Italian bank. That acquisition is in line with ABN's strategy of being a strong regional player rather than a global player. But, like Citigroup, it is finding that making acquisitions work is not easy. There are already rumours of ABN Amro becoming a takeover target itself- with Citigroup as a possible contender.

You can see what is common to the three banks: they judged that they could not grow fast enough organically and tried to grow through acquisition. But such growth is not delivering shareholder value. There is one place where growth through acquisitions may make sense for banks such as HSBC and Citigroup: emerging markets. Trouble is, the two biggest markets, India and China, are not open to such possibilities.

The lesson? Beware of the lure of growth through acquisition unless there are huge gains that are easily had. It also follows that when organic growth is possible, there is nothing like it. That's why I've been wary of the clamour for consolidation among the larger public sector banks. In the last few years, these banks have seen very good growth. If such possibilities begin to shrink, then- and only then- should they think of consolidation.