Minnow Plus Minnow Equals Shark?

Kredietbank's euro survival gambit: Merge its way to strength

Even the threat of a hurricane could not stop Marcel Cockaerts, the 63-year-old president of Belgium's Kredietbank, from competing in his bank's annual 6-kilometer cross-country race. His wife prefers that Cockaerts avoid such strenuous pursuits. But, he contends, "these exceptional times call for a special effort."

These are, indeed, exceptional times for heads of midsize banks such as Cockaerts'. European banking is consolidating as next year's debut of a single Continental currency nears. That's leaving less room for regional players such as Kredietbank, with only $1 billion in assets. Many face a quandary: Do they wait for bigger rivals to drive them into the ground and gobble them up? Or do they try to buy lenders of a similar size to complement their businesses?

SHOPPING SPREE. All three major Belgian banks, along with thousands of regional German, Italian, and Spanish banks, are racing to find partners or mergers. The recent union of giant Union Bank of Switzerland and Swiss Bank Corp. looks sure to speed consolidation. "We have seen two of the giants in Switzerland throwing in the towel and acknowledging they are not large enough," says Matthew Czepliewicz, an analyst at Salomon Brothers International Ltd. in London. "That makes everyone reconsider their position."

For now, at least, Kredietbank is in a position of strength. With a 14.6% return on equity in 1997, it is the most profitable bank in Belgium and one of the most acquisitive. Three years ago, it was Belgium's third-largest bank. Today, it is second only to Generale Bank and the dominant player in the country's fast-growing Flanders region. After purchasing several small local lenders last year, Cockaerts recently announced his desire to merge with Cera, the country's sixth-largest lender. The deal would create Belgium's No.1 bank. And Cockaerts has also been talking to foreign banks such as Rabobank Nederland about a cross-border tie-up. "We're keeping our eyes open," he says.

First, however, he needs to close the Cera deal. The merger has been slowed by an investigation into Kredietbank's activities in Luxembourg. Belgian police recently arrested the president of KB Lux, a sister company, suspected of illegally advising clients to park money in Luxembourg to avoid Belgium's high tax rates. Although Kredietbank has not been charged, Cockaerts admits "some individuals" in the bank "may have engaged in such practices." But, he adds, "we did not set up an organized machine to cheat on taxes," as prosecutors claim. The KB Lux executive has been released, but the probe continues, police say.

Despite the legal problems, Cockaerts believes the Cera merger will fly. The new bank will be able to cut costs by closing or merging some of its combined 1,800 branches. Kredietbank and Cera together could boost market share, selling more products, including insurance. "The merger will strengthen our commercial presence," says Cockaerts.

Even so, the group still would be relatively small by European standards. "Putting two small fish together doesn't create a shark," says Danny Wittemberg, an analyst at Dewaay Brokers in Brussels. "The Kredietbank-Cera merger is a necessary but insufficient step."

Indeed, many of Kredietbank's flourishing units risk being more outgunned. For example, Ruth Devenyns, one of only 10 financial analysts at the bank's KB Securities arm in Brussels, specializes in high-tech initial public offerings. Her business has soared as Belgian biotech and computer startups have raced to market. But U.S. high-tech specialists such as Hambrecht & Quist recently opened an office in London to cover Europe, while investment banks such as Goldman, Sachs & Co. also have become more aggressive.

With competition closing in at home, Cockaerts wants to expand beyond Europe. Kredietbank already gets one-third of its profits outside Belgium. It was the first Belgian bank to open a branch in China, for instance. Despite Asia's crash, which will result in at least a $20 million write-off for bad loans, the bank won't retreat. Cockaerts is looking to pick up undervalued assets in Asia, as well as to grow in Eastern Europe and Latin America. But it's at home in Western Europe, where Kredietbank will make it--or be eaten by bigger sharks.

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