Presented at the Bankers Association for Finance and Trade Advancing Global Trade and Investment Mee

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Gene Pappas
Expert Principal McKinsey Company Scenarios
for European Banking Consolidation
Presented at the Bankers Association for
Finance and TradeAdvancing Global Trade and
Investment MeetingApril 9 11, 2006The
Fairmont Scottsdale Princess
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This presentation is not intended to be used as
the basis for any transaction. Nothing herein
shall be construed as legal, financial,
accounting, investment or any other type of
professional advice. If any such advice is
required, the services of appropriate
professional advisers should be sought. No
part of this presentation may be copied or
redistributed in any form without the prior
written permission of McKinsey Company.
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Background to discussion
Background research 2003 current Creating
value through cross border MA (2003) Vision
2010 scenarios for European banking (2004)
Negotiating better cross border banking deals
(2005) Client service with over 2/3rds
of Europes largest banks Discussions
with investors and investment banks
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Four scenarios for 2010
Bright European Dawn
The Second Wave
The Age Of Execution
Regulatory and political context
The Stagnant Heart of Europe
Degree of industry restructuring
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Scenario The Age of Execution

• Tough outlook for European banks from competitive
  pressures
• Regulation with net positive impact

Summary

• Main focus is on execution
• Retail Improved service quality/lean processes
• Wholesale Most banks focus on small and
  mid-sized companies top 20 build sophisticated
  pan-European corporate banks
• Global majors take share steadily in capital
  markets

Management strategies

• Further domestic consolidation in Germany and
  Italy, but limited elsewhere
• Small/mid-sized banks Rationalisation and
  development of some regional groups in UK,
  Iberia, Benelux
• Large US and European banks focus on acquisitions
  in New Europe, Asia, Americas

MA strategies

• Great executors in retail
• In wholesale, global universal banks and
  pan-European corporate banks

Winners
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European retail banking sector productivity has
improved but still lags US and has wide variations
Indexed to the US in 2002, PPP adjusted
CAGR1995 2002,
Sweden
2.8
US
3.6
Belgium
3.4
Netherlands
3.8
UK
3.0
France
2.0
Portugal
9.9
Germany
4.4
Italy
3.3
Spain
5.6
Productivity per employee, defined as output
per capita divided by input per capita Source
McKinsey Global Institute
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Substantial amounts of excess capital looking for
growth Capital generation of top 50 European
banks 2004 06, EUR Billions
330-370
100-110
85-95
75-85
90-100
150-210
85-95
55-65
Excess capital 2003
Expected net income 2005
Expected net income 2004
Expected net income 2006
Available capital before growth and dividends
Funds to finance organic growth 2004 - 06
Expected dividend payouts 2004 - 06
Excess capital after growth and dividends
Mega-cap banks
20 - 30
40 - 50
50 - 60
50 - 60
160 - 200
60 - 70
20 - 80
60 - 70
Excess funds based on tier 1 ratio of 7 and
total capital ratio of 10.5 Based on
dividend payout ratios 2003 Citigroup, Bank
of America, HSBC, JPMorgan Chase Source Bloomber
g Datastream World Market Monitor McKinsey
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CEO agenda Age of Execution
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Four scenarios for 2010
Bright European Dawn
The Second Wave
The Age Of Execution
Regulatory and political context
The Stagnant Heart of Europe
Degree of industry restructuring
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So, are we seeing a new wave of European
cross-border MA? Share of cross-border
transactions in European banking based on deal
value,
2006 Analysis
Number of transactions
119
92
127
112
122
131
128
88
53
36
53
100
46
56
63
64
68
69
domestic
70
72
74
81
85
54
44
37
36
32
31
cross border
30
28
26
19
15
04
03
02
01
2000
2005
98
1995
97
99
96
Completed deals with a total deal
volume gt USD 100 million target European,
acquiror European or non-European, target
industry is Finance Source Dealogic, McKinsey
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Five key value levers to achieve gt30
premium Percent of target market cap
(pre-premium)
2003 Analysis
Primary value drivers
Financial impact
Portfolio restructuring
Performance improvements
Option value
A
B
C
D
E
Synergies
Total
Strategy
Expand into geographically adjacent markets
0 - 2
4 - 8
14 - 19
9 - 14
25 - 39
1
Regional leader
Additional domestic acquisitions
2
30 - 56
Superior owner
0 - 7
3 - 6
12 - 19
21 - 30
Platform for further growth
3
Scope champion
11 - 45
(-4) - 5
0 - 10
5 - 10
10 - 20
35 pre-mium
Typical timing for capture, Years
lt 1
1 - 3
gt 3
1 - 3
N.A.
Based on case analysis of potential
transactions between European banks/financial
institutions, June 10, 2003
Non-exhaustive Before option value,
after restructuring costs of (-4) to (-2) for
regional leader and (-6) to (-4) for superior
owner Source McKinsey
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Scenario The Second Wave
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Emergence of regional and super-regionals?
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Reasons (good and bad) to expect more
cross-border MA
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Many are asking what will mega-cap banks do on
the MA front?

• Will they make a major play in European retail
  banking?
• Will BofA Wells develop into truly global
  players?
• Just how high are their aspirations ?
• Can they leverage sheer scale into competitive
  or regulatory advantage?

• Will they continue building in the U.S., or look
  for other moves in Europe?
• Other than HSBC, which other European mega-caps
  will build major positions in Asia?
• Will another European mega-cap emerge?

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Four scenarios for 2010
Bright European Dawn
The Second Wave
The Age Of Execution
Regulatory and political context
The Stagnant Heart of Europe
Degree of industry restructuring
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Vicious circle interaction of regulation and
management action
Anti-market regulation anti-bank consumerism
Higher costs of compliance
Limits on consolidation
Treat customers poorly
Slow growth in productivity
Limited innovation/ poor value for money
Reduced competitive intensity
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Four scenarios for 2010
Bright European Dawn
The Second Wave
The Age Of Execution
Regulatory and political context
The Stagnant Heart of Europe
Degree of industry restructuring
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Virtuous circle positive interaction of
regulation and management action
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Concluding thoughts
Sentiment moving more favourably towards
European bank consolidation, but still high
investor scepticism Huge uncertainties over
speed and ultimate degree of change All bank
strategies need to combine no-regrets actions
for winning under Age of Execution High-perfo
rmers should keep active stance on potential
cross-border moves ..but always with a high
bar for value creation
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Further information
McKinsey Quarterly www.mckinseyquarterly.com
Gene Pappas gene_pappas_at_mckinsey.com
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Gene Pappas
Expert Principal McKinsey Company Scenarios
for European Banking Consolidation
Presented at the Bankers Association for
Finance and TradeAdvancing Global Trade and
Investment MeetingApril 9 11, 2006The
Fairmont Scottsdale Princess