Saturday, April 14, 2007

Citigroup woes- the travails of bank mergers

Citigroup will slash 17,000 jobs in order to get a grip on costs. The stock has been an underperfomer for the past five years and the Citigroup CEO Chuck Prince is under pressure from shareholders to show results.

But wait a minute. Wasn't this bank supposed to be effecting huge savings from the mergers of earlier years? Clearly, those savings have failed to materialise. As somebody who has long been sceptical of bank mergers, I am not surprised. Cost savings and synergies are difficult to realise in any merger. In a bank merger, the difficulties are even greater. An edit in FT (April 11) puts it very well:

In the early days of bank mergers, there are some easy wins. It is relatively simple to put together Treasury operations and, at least in the US, close overlapping branches. Investment banking arms can also be reshaped although investment bankers are easily upset and disinclined to save money for the greater corporate good.

But slapping some new signs on branches only goes so far. In the longer term, retail banks are tough institutions to remould. National Westminster Bank’s troubles in the 1990s, which led to its takeover by Royal Bank of Scotland in 2000, were partly due to bloat from its founding merger in 1968.

Old technology cannot simply be ripped out and replaced because computer systems – and often paper files – carry customer and loan information that have to be retained. Tight central controls on credit must co-exist with local oversight of lending. Many different products from credit cards to insurance, must be managed well.

Add to this the complexity of cross-border mergers. Citigroup wants to expand internationally, as its takeover bid for the Japanese broker Nikko Cordial shows. European banks are venturing into such mergers and Barclays is discussing with ABN Amro sensitive issues such as head office location.

The lesson is twofold. First, do not underestimate how difficult it will be to gain enduring value from a merger after the initial gains. Second, keep working to implement mergers, even years after the event. Having failed to obey both principles, Citigroup is struggling to salvage its reputation

Banks in the US and Europe at least have some compulsion to merge- they find it difficult otherwise to sustain growth in profit. Here in India, that compulsion is missing. In today's environment where commercial credit is growing at 30% and profit growth too is healthy (despite rising interest rates and stiff provisioning requirements imposed by RBI), mergers among the top banks can hardly be a priority.


Paresh Y Murudkar said...
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T T Ram Mohan said...

Paresh, you are right. For private and foreign banks, merger is a way of getting branch licenses as the RBI is not free in dispensing these. That is certainly an important motivation for mergers in India.

My comment about the inadvisability of mergers, you will notice, relates to "top" banks- I was talking about public sector banks for whom branch network is not an issue.


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