the age of the banking titans - bcg – global … u.s. consolidation since the beginning of the...

Opportunities for Action in Financial Services

The Age of the Banking Titans

Banking Titans 3/19/04 3:46 PM

The Age of the Banking Titans

The trend toward larger and larger financial institu-tions has long been gaining momentum. Until recent-ly, however, only two banks in the world had a marketcapitalization of more than $100 billion: Citigroupand HSBC. Now, two new mergers—J.P. MorganChase with Bank One and Bank of America withFleetBoston—will create a couple of additional mem-bers of this still-exclusive club.

These recent mergers have obvious significance forthe dynamics of the U.S. banking market. But theyalso send an important, even ominous, message to the global financial services community. A new era is dawning: the age of the banking titans.

The coming of this era has profound implications forthe long-term structure of the banking industry world-wide. It is highly likely that, in the short- and medium-term, we will see an increasing number of classic do-mestic mergers, which will lead to the creation of newregional powers. A greater number of transregionalcombinations should follow, which in turn will lead tothe creation of additional titans. (See Exhibit 1.)

Indeed, many leading U.S., European, and Asia-Pacific players are already revisiting their expansionstrategies with a new sense of urgency. The stalledcross-border merger process in Europe will likely berevitalized as institutions consider steps to keep pacewith the growing number of titans—or at least tobecome large enough to discourage unwelcomeadvances coming either from their home markets or from abroad.

Moreover, given the scope for continued consolida-tion in the United States, the stage is being set for the

Banking Titans 3/19/04 3:46 PM Page 3

evolution of even bigger titans with truly global influ-ence. If a new wave of U.S. consolidation heats up—and indications are that it will—the biggest banks mayultimately reach two or even three times the size ofthe current four titans, dwarfing all other financialinstitutions in the world.

The forces at play could, of course, develop in anynumber of ways. But one thing seems certain: withmore and more banks looking for partners to pair offwith, all financial institutions must have a clear strate-gy in place if they hope to control their own destinies.

Size/maturity

Time

Transregional2

U.S. regional

Europeannational

U.S. super-regional

Large European(cross-border)

Large U.S./large European(global impact)

Merger of equals

Economies ofscale/scope

Expansion frombanking into all

areas of financialservices

Growing capitaladvantage

Type ofbankmerger

Rationale

Titanic3

Classic1

SOURCE: BCG analysis.1Examples include North Fork Bancorporation/GreenPoint Financial.2Examples include J.P. Morgan Chase/Bank One and Bank ofAmerica/FleetBoston.3Examples include Citigroup/Koram Bank and HSBC/Household.

Exhibit 1. The Evolving Financial ServicesLandscape


Assessing U.S. Consolidation

Since the beginning of the 1980s, the U.S. bankingmarket has significantly transformed itself. What wasthen a highly fragmented industry dotted with manythousands of small institutions is now a market inwhich the top ten players in terms of deposits holdabout 36 percent of the total share—up from about26 percent just five years ago. (See Exhibit 2.) Yetdespite extensive consolidation, a significant gap still exists between the level of concentration in the United States and that in virtually every othermajor economy in the world. (See Exhibit 3.)

Given the high market capitalizations and acquisitionpower of the biggest U.S. players, we anticipate that atleast two more U.S. titans could emerge by 2010. Iffive institutions came to control, say, a 75 percentshare of the U.S. market—a feasible projection—theymight range in size from $150 billion to $500 billionin market capital. These institutions would potentiallybe the most powerful financial services companiesglobally.

The discrepancies in scale between the world’s largestbanks and the rest of the field are already well evi-dent. For example, the two recently minted titans, thenew J.P. Morgan Chase and Bank of America, willhold twice the market share in key product categoriesas many other top U.S. banks. They will control be-tween five and ten times the amount of deposits heldby other leading banks. What is more, the mergersthat forged these titans are particularly noteworthybecause they lack the geographic overlap of previousretail combinations in the United States. Such overlaphas often been the primary source of synergy and costreduction between large regional banks. The recentmergers create enormous—almost national—U.S.deposit bases. Also, both new entities—along with


Top ten banks(1998)

Marketshare (%)

Deposits($billions)

1. Nations Bank 159 4.42. First Union 134 3.73. Bank America 130 3.54. Chase 126 3.45. Banc One 85 2.36. Wells Fargo 71 1.97. Fleet 67 1.98. Citicorp 63 1.79. Norwest 56 1.5

10. National City 54 1.5

Top ten banks 945 25.8Total U.S. banks 3,658

Top ten banks(2003)

Marketshare (%)

Deposits($billions)

1. B of A/FleetBoston 513 10.02. JPMC/Bank One 353 6.93. Wells Fargo 228 4.44. Wachovia 197 3.85. Citigroup 184 3.66. U.S. Bancorp 125 2.47. SunTrust 74 1.58. National City 64 1.29. BB&T 54 1.1

10. Citizens Bank (RBOS) 54 1.0

Top ten banks 1,846 35.9Total U.S. banks 5,130

SOURCES: FDIC; BCG analysis.NOTE: Some figures have been rounded.

Exhibit 2. The U.S. Deposit Market


Citigroup—will be market leaders in some asset class-es that have traditionally been associated with mono-line businesses, such as cards, consumer finance, andmortgages.

Clearly, the number of combinations among smallerregional banks that have followed on the heels of theJ.P. Morgan Chase/Bank One announcement—suchas Regions Financial/Union Planters, North ForkBancorporation/GreenPoint Financial, and SovereignBancorp/Seacoast Financial Services—suggests thatU.S. banks are feeling the pressure to bulk up andreduce scale discrepancies. A new merger wave isalready under way.

Overall, the emergence of additional titans—some ofwhich could possibly be forged in Europe and the

Averagemarketcapitali-zationof top three banks, 2003($billions)

Collective share of market capitalizationof top three banks, 2003 (%)

Japan

United States

United Kingdom

France

Germany

SpainAustralia

CanadaItaly

Switzer-land

200

175

150

125

100

75

50

25

Pro forma1

0 10 20 30 40 50 60 70 80 90 100

Average world, 2003

SOURCES: Thomson Financial Datastream; BCG analysis.NOTE: Data refer to publicly listed companies.1The pro forma point includes recent U.S. mergers.

Exhibit 3. Share and Size of Market Capitalizationby Country


Asia-Pacific region as well as in the United States—will create a new set of forces on the global finan-cial services landscape that will build on the pre-existing logic of realizing economies of scale and in-creasing efficiency through domestic mergers. Andonce titans are created, they will have only three clear growth paths: completing the consolidation ofmonolines, branching out into insurance and othernonbanking financial services markets, and expand-ing globally.

Taking Stock of Size

Substantial size gives any financial institution a great-er degree of control over its own destiny. And in theage of the banking titans, size will naturally mattermore and more. To survive and prosper in such anera, banks at all levels of market capitalization mustdevelop and execute a clear strategic path forward.

Every CEO must formulate a view on the followingquestions:

• If we remain the same size, how can we competewith the pressure of the titans’ huge internal prod-uct engines?

• What level of market capitalization do we needbefore the number of predators that threaten usdecreases significantly? At what level do we becomea predator that others must reckon with?

• What sort of merger—as either an acquirer or atarget—would allow us to build a competitivelyadvantaged position and deliver tangible value toour shareholders?


The answers to these questions will, of course, differfor every institution, depending on its current sizeand home market. For smaller banks, the goal may betrying to build a local franchise that performs strong-ly enough to create some degree of immunity to theconsolidation process and is able to win customersfrom distracted merging players. For larger banks, the consolidation process will speed up—a change in Europe, in particular, where merger activity hasslowed somewhat over the past two years.

Because market concentration is already much high-er in Europe than in the United States, leadingEuropean banks will need to forge successful cross-border mergers or seek trans-Atlantic partners.Smaller-scale roll-up strategies, which there is stillroom for in the United States, will not be sufficient.BNP Paribas’s recent acquisition of Community FirstBankshares, which is based in North Dakota, illus-trates this dynamic.

What is more, the above questions do not apply solelyto banks. Once the banking industry is fully consoli-dated, the titans’ appetite for growth is likely to turnto other areas of financial services. Therefore, insur-ers, asset managers, consumer finance institutions,and card companies must also be on their guard andconsider the same set of questions.

Dancing with the Titans

Financial institutions in both Europe and the Asia-Pacific region face the possibility of being over-whelmed by the growing group of U.S. titans. J.P.Morgan Chase and Bank of America, for example,may find a taste for launching into European and


Asian consumer banking—perhaps sooner ratherthan later. Citigroup has already done so, and HSBChas moved into U.S. consumer finance. At the sametime, the current softness of the U.S. dollar couldprompt many large European players to direct theiracquisition aspirations far westward, past both conti-nental and U.K. borders.

Ultimately, in the age of the banking titans, all finan-cial institutions must explore potential acquisitions oftheir own and simultaneously plan possible reactionsto advances that may come from domestic or foreignsuitors. Failing to consider both eventualities puts anybank’s long-term independence at risk. We thereforeurge financial institutions to take the following twoinitiatives:

Explore potential acquisition targets for your institu-tion both at home and, for larger banks, across bor-ders. Analyze possible product and market synergies,long-term value creation, and particularly the finan-cial feasibility of the deal. Carefully consider IT andback-office system compatibility: single platforms serving multiple markets with multiple products can bring huge benefits. Assess the potential fit withyour target’s corporate culture. Consider the sacri-fices necessary to combine with potential partnersand weigh those sacrifices against the potential valueto be generated.

Examine fully your attractiveness as a target andgauge your vulnerability to takeover. Construct merg-er scenarios, both in your domestic market and acrossborders, that would make sense for both players. Ex-plore how these possible mergers, especially those inwhich you might not be involved, would affect yourmarket position.


Finally, if you sense your own vulnerability and see apotentially excellent merger fit, don’t be afraid to ini-tiate a bold acquisition move. In the age of the bank-ing titans, many players will soon be leaving the dancetogether. Can you afford to be left behind?

Jon NicholsonRanu DayalNick Viner

Jon Nicholson is a vice president and director in the Sydneyoffice of The Boston Consulting Group. Ranu Dayal is avice president and director in the firm’s New York Office.Nick Viner is a senior vice president and director in BCG’sLondon office.

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© The Boston Consulting Group, Inc. 2004. All rights reserved.


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the age of the banking titans - bcg – global … u.s. consolidation since the beginning of the...

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