Like most people, bank CEOs say one thing and do another. Despite spectacular mergers such as JP Morgan-Bank One, chief executives of banks, insurers and other financial services companies say they favour organic growth over merger and acquisitions.
A survey by consultants Mercer Oliver Wyman released at the Davos conference found nine out of ten favour organic growth. “CEOs…demonstrated an overwhelmingly consistent view that the route to achieving value growth is through organic growth — 90 per cent cited this as a priority, with expansion into new markets coming second on the list,” says Mercer Managing Director Nader Farahati. “By contrast, just 15 per cent were looking to make a major merger, acquisition or disposal in 2004. Results suggest that a successful value-building formula in financial services will be a combination of strong organic growth and selective acquisitions, not blockbuster M&A.”
Mercer repeated its forecast, made a year ago, that the global financial services sector is set to triple in value by 2013, outperforming many other sectors. By the end of 2003, the industry was worth $6.7 trillion, exceeding its prior peak, while non-financial companies are collectively worth almost a third less than their peak values, the company says.
Mercer also says that shareholder value has varied significantly. According to its annual State of the Financial Services Industry Report, better disclosure and transparency in financial services will help to narrow its traditional valuation discount to other sectors, which currently stands at 35 per cent. Over the last five years, Mercer detects a major shift in market value away from Japan, European insurers and European diversified financial firms, which collectively lost $690 billion in relative market cap against the financial services sector as a whole.
By contrast, investment banks, North American insurers – in particular those providing health insurance – and European universal banks collectively gained more than $400 billion in relative market cap. UnitedHealth Group, Golden West Financial, Sun Life Financial Services, United Overseas Bank and Lehman Brothers (LEH.N:) are the top five large cap performers for 2003 in Mercer Oliver Wyman’s five-year Shareholder Performance Index (SPI). The SPI is a five-year measure of risk-adjusted relative shareholder performance that covers the largest 400 quoted companies in the sector globally. Over the last five years, UnitedHealth Group, Royal Bank of Canada, Royal Bank of Scotland, Citigroup and Danske Bank were the most consistent performers in terms of their SPI performance.