Magazine article Global Finance

Cutting Costs and Gaining New Markets

Magazine article Global Finance

Cutting Costs and Gaining New Markets

Article excerpt

Cutting costs is essential to the survival of many small domestic banks in Europe, and the coming of European Monetary Union simply raises the ante. Interest rates are at historic lows in Europe; income at the margin is shrinking. The same assets now bring in less income. Banks need to slash unit costs to sustain their levels of return.

Other traditional sources of income will also be eroded by the euro. Banks that have earned money on foreign exchange transactions, for example, will lose a major source of income overnight. Local banks that have relied on commission from trading government bonds will lose their strategic advantages.A French bank, for example, could place and trade a eurobond in Belgium as easily as a local bank.

In February, Brussels-based Kredietbank announced it was becoming a "player that counts" by annexing CERA, also based in the Flemish-speaking region of Belgium. The new entity will become the largest financial services group in Belgium. "These banks recognize that getting bigger means smaller costs-they can double their assets through a merger without doubling up on branches and IT systems." says Matthew Taylor, an analyst at Fitch IBCA in London. "They can also share the cost of changing just one IT system to cope with the euro."

Bigger banks as a general rule often have better credit ratings than their smaller rivals, which means that they have access to cheaper money. CERA has slashed the price it pays for funds in the market by riding on the back of Kredietbank's stronger rating. …

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