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Citigroup is on a mission. Its chief executive Chuck Prince said this week that he was seeking overseas acquisitions to help the bank reach its target of generating 60 per cent of its earnings outside the US more rapidly. Citi has an obvious problem: its reliance on earnings from a slow-growing home market where it already has a high market share. It is a pressing problem for European banks too. Indeed, Citi is unusual in the US because it already generates 43 per cent of profits overseas. Most US banks can pursue consolidation in what remains a fragmented domestic sector. Many European banks do not have this option.
Still, some investors are loath to support banks’ overseas acquisitions. For example, UK shareholders – a particularly conservative bunch – put pressure on Royal Bank of Scotland’s management to return cash, following controversial overseas investments. It is true that the UK banks have a chequered history when it comes to foreign acquisitions. But sticking to one’s domestic knitting can have equally disastrous results. Take Lloyds TSB. For a brief period in the 1990s it became, on some measures, the world’s most profitable bank by focusing relentlessly on its home market. Today, Lloyds’ market value has shrunk relative to its peers. A total return of 34 per cent since 2000 is less than a quarter of that achieved by RBS. Commerzbank’s reliance on Germany has led to even more dramatic underperformance.
The now-widespread appetite for growth has already sparked a string of acquisitions in Greece, Turkey and eastern Europe, where retail financial services are booming. Banks have bid up prices to three or even four times book value. Some, including Citi, have walked away to avoid overpaying; others have not. It is worth remembering what informed Lloyds’ 1990s strategy: in 1989, it reported the biggest loss yet by a UK bank after a massive write-off of Latin American bad debt. When the current banking cycle turns, the true cost of recent acquisitions for some banks will become apparent, and the appetite for acquisitions in emerging markets could fade rapidly.