HSBC and Santander, Europe's top two banks, are stretching their lead over hard-hit rivals and may have a window of opportunity to drive home their capital strength advantage to pick up bargains and market share. Unlike most banks, the main challenges facing HSBC and Santander are more strategic than financial.
Their strong capital and liquidity leaves them well placed to make acquisitions. But a shaky global economy and headwinds in key markets may mean their best bet is to push hard on organic growth and consolidate their capital advantage, analysts said.
"I think HSBC has learnt the lesson that buying something because it's cheap is not that good a thing to do on a four or five year view, and I don't think they will this time around," said Simon Maughan, analyst at MF Global.
The bank is pursuing a $6 billion deal in Korea and threatening to "deploy capital", but its ill-fated purchase of US lender Household five years ago and a deal for France's CCF in 2000 are reminders that attractive pricing does not always result in a bargain.
Spain's Santander looks in more acquisitive mood after buying UK lender Alliance & Leicester last month at a knock-down price and picking up consumer finance assets.
But a deteriorating Spanish property market could eat into its capital advantage and restrain its deal appetite. "They should preserve their capital and wait and see what the Spanish economy serves up in the next 24 months," Maughan said.
WE CAN "DEPLOY CAPITAL":
HSBC was one of the first banks to be hit by problems with US mortgages and has lost billions of dollars there, but it is emerging from the year-old credit crunch better positioned than most rivals thanks to its traditionally strong balance sheet.
Its core tier 1 ratio is 7.7 percent and a loan-to-deposit ratio of 90 percent gives it a capital cushion, adequate liquidity and lower financing costs. Santander has avoided the massive credit-related losses suffered by many and has a comfortable core tier 1 ratio of 6.3 percent.
Rivals such as UBS, Royal Bank of Scotland and Citigroup have had to raise billions from investors and sell assets to repair balance sheets.
HSBC Chairman Stephen Green said recently he had the capacity to "deploy capital" while others were constrained. But he made it clear spending will be directed at emerging markets.
He told Reuters "there will be windows of opportunities, not just one" to exploit, citing its recent jump in UK mortgage lending at higher margins as an example.
Santander is grabbing even more of that profitable UK mortgage pie through Abbey, although after paying 1.3 billion pounds ($2.43 billion) for A&L, it said it will stay disciplined on capital and shrink the Abbey/A&L balance sheet by up to 30 billion pounds.
Santander executives played down the prospects of more deals last month, saying their hands are full integrating Abbey, A&L, Brazil's Banco Real and consumer finance operations.
"I don't think it will be on the acquisition trail again too soon," said Renta 4 analyst Nuria Alvarez.
But analysts said its shares still discount acquisition risks, and Santander has held talks about buying Germany's Dresdner, industry sources have told Reuters.
The bank is also a nimble dealmaker - as shown by its sale of Italy's Antonveneta last year for a quick, big profit - and could sell assets or raise funds to finance a deal if needed.
One industry source said Santander and HSBC will be among those "circling the wagons" around vulnerable assets, but predicted deals will be rare until financial markets return to a more solid footing. That could take some time.
"Banks will see their best competitive advantage as not having a capital shortage. It may not maximise returns, but more people are concerned about minimising the downside risks," he said.
HSBC has warned that Asian economies are set to slow, on top of more US losses and rising bad debts in Europe and Mexico. Santander can add the threat of a Latin America slowdown to its domestic problems.
HSBC has leapfrogged US rivals to now rank as the world's third biggest bank and the largest outside China with a market value of $200 billion. Santander ranks 7th biggest globally with a value of $116 billion.
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