The meek might one day inherit the earth, but for now it appears they are making a start with the European banking sector.
Where once swaggering, debt-driven raiders and traders from Britain, Belgium and the Netherlands held sway, the post-financial crisis landscape is now dominated by sedate, low-risk retail banking giants from Spain, France and Italy.
"There was stress at every level, and it has changed the sector," says Antonio Ramirez, a London-based banking analyst with Keefe, Bruyette & Woods Inc. "The monoline businesses are gone ... highly leveraged operations are gone, the bancassurance model is under pressure." Filling the leadership vacuum are conservative retail lenders, who for the most part avoided toxic assets.
For many dealmakers, these new and unassuming kings of European banking present a real challenge. In a cut-price market that appears ripe for consolidation, they are leery of striking any large merger or acquisition.
"Everyone with a bit of room to maneuver is looking for assets to buy cheaply," says an executive at a Paris-based lender who asked not to be named. "That doesn't mean they are buying. [The banks] that have money have it because they don't like risk, not on their books and not in M&A."
In some aspects it's a rotten time to be thinking about a big acquisition. Debt markets are still parched, and even where funds are available there is little thirst among managers or shareholders for levering a balance sheet.
At the same time, capital that might otherwise be used for deals has been turned inward to rebuild core asset ratios and meet regulators' more onerous liquidity demands.
Yet it's not only financing issues weighing on deals. The lack of activity also reflects a new Spartan self-denial that now pervades the European banking sector.
The mood is understandable. Europeans, and by proxy their governments, have, like Americans, not forgiven lenders for leading their economies to the brink of collapse.
In some countries the sense of outrage remains raw, as taxpayer money continues to prop up major financial institutions. Britain this month poured £31.2 billion ($51.2 billion) into its part-nationalized lenders Royal Bank of Scotland Group plc and Lloyds Banking Group plc.
To be sure, not every European nation has been poorly served by its lenders. Why countries like France and Spain, where banks took little state money and have repaid much of what they did take, should be demanding penance to the same extent as the U.K. or the U.S. is mystifying.
Yet that is the situation, and while it persists, talk of aggressive growth and in particular global expansion, remains taboo. That doesn't make the idea wrong. Rarely has there been more pressure, or justifiable rationale, for European banks to think about buying each other.
Stripped of lucrative operations, such as high-risk proprietary trading and junk mortgage underwriting, both of which collapsed expensively in the financial crisis, European bank profitability, even at healthy lenders, appears doomed to remain in the doldrums.
Given the ravages of the financial crisis, it's tempting to applaud this new era of risk-averse, low-return banking as a universally good thing. But bank bosses should still try to maximize profits.
For the new top dogs of European banking, with their plodding retail focus, the only way to do that is to reduce per-customer service costs. That means building economies of scale, and doing that in a hurry means M&A.
Deals have been struck. Carefully, incrementally, and with a focus on acquisitions that can be easily integrated, lenders are rounding out their businesses.
The only German bank to have escaped the international financial crisis with its business intact, Deutsche Bank AG, led by CEO Jospeh Ackermann, last month agreed to pay €1.3 billion ($1.9 billion) for the mainly German private banking operations of Sal. Oppenheim jr. & Cie. SCA Deutsche Bank is also in talks to increase its stake in Deutsche Postbank AG, one of Germany's biggest branch operators.
Société Générale SA of France said in October that it is negotiating to buy the 20% it doesn't already own in Crédit du Nord SA, a regional French commercial banking network that specializes in servicing small businesses.
Across the channel, Britain's Barclays plc escaped the financial crisis largely because it was defeated by rivals in the disastrous 2007 acquisition of ABN Amro Bank NV, prevented by the U.K. government from buying Lehman Brothers Holding Inc. before it went bankrupt and bolstered by a capital injection from Middle Eastern investors. The London-based bank is now running its eye over a portfolio of about 135 Italian bank branches.
Spain's biggest lenders, Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, have meanwhile set about cherry-picking U.S. operations to add to their stateside businesses. On Nov. 10 Santander, led by chairman Emilio Botín (pcitured above), announced that it had paid $900 million to buy a portfolio of U.S. car loans from HSBC Holdings plc. If none of these deals get the heart racing, that won't bother Europe's newly somber banking elite. Dealmakers craving the next rush may find it an unlikely source.
In the past few weeks, the European Commission has ordered a handful of Europe's former banking giants to break themselves up as penance for receiving state bailouts.
"These are the banks that put the most stress on the system and which escaped failure only because of state backing that broke EU rules," says analyst Ramirez. "It is right and logical that there is some kind of price to be paid."
The EC intervention promises to throw up some interesting buying opportunities. ING Groep NV at the end of October agreed to sell its entire insurance operation along with other assets, including its U.S. online banking operations, representing 45% of its balance sheet, or about €600 billion in assets.
The Dutch insurer has four years to sell the operations, though Europe's more predatory insurers, such as Zurich Financial Services Ltd., Allianz SE and Assicurazioni Generali SpA, are unlikely to wait that long to make their move, according to analysts.
Acquisitive banks are likely to be more tempted by such sales on offer in the U.K., where the EC has cajoled the British government into putting a staggering 10% of the entire U.K. retail banking market on the block over the next four years.
That includes Lloyds Banking Group's mortgage lender, Cheltenham & Gloucester plc; 600 branches, principally in Scotland; and online banking business Intelligent Finance.
Royal Bank of Scotland will sell 318 branches, its insurance operations and a portfolio of 230,000 small and midsized business customers, among other assets. The British government also plans to sell the marketable bits of Northern Rock plc, a nationalized mortgage lender in the process of being split into a good and bad bank.
If the British economy manages to shrug off its blues, and that remains a big if, even given the four-year time frame, those assets might yet attract a large Italian or French bank looking for diversification. Spain's Santander, which already has a significant presence in Britain as a result of past acquisitions, might also be enticed into an offer.
The British government, which will own 84% of Royal Bank and 43% of Lloyds, will be hoping for a heated bid battle. Like many in the deal community, it may find itself sorely disappointed.