European banks struggle to crack US retail market

Last month Spain’s BBVA announced a retreat from the US retail market with the sale of its operations to Pittsburgh-based PNC. The retrenchment illustrates how few European lenders have managed to crack North America.

For four decades, the vast US retail banking sector has drawn in European players seeking to outgrow their much smaller domestic markets. With 124m households using bank accounts and higher interest rates than on offer at home, the US promised European banks room for expansion and healthy profit margins.

But success has proved elusive. In recent years, US rivals such as JPMorgan and Bank of America have doubled down on their domestic retail operations, squeezing out foreigners in a competitive market.

Meanwhile, the Federal Reserve’s decision to cut US interest rates to zero this March removed one of the few remaining reasons for European lenders to operate in North America.

European banks still operating in the US are asking themselves tough questions about whether they should expand or retrench.


HSBC first dipped its toe into the US market by taking a 51 per cent stake in Marine Midland Bank in 1980, buying the rest of the Buffalo, New York-headquartered lender in 1987. By 2011 the bank ran 470 branches in the US.

But the group’s US business was hit by the financial crisis, writing down huge losses on the credit card business that it bought from subprime lender Household in 2003. “These losses affected the way the group thought about things for years, even today,” said a former executive.

When Stuart Gulliver became group chief executive in 2011 he set about trying to slim down the US business. He focused it more on wealthier customers and pared back its presence in mass market consumer finance services. This started with the sale of 195 branches to First Niagara Financial Group for $1bn and then disposing of its $30bn credit card book to Capital One, both in the summer of 2011.

The division continued to struggle, recording pre-tax losses of $182m in 2018 and $279m a year later.

Realising that the US operation was unbalanced and lacked an unsecured lending business, the US board attempted to make the business more profitable and focused on international clients. Michael Roberts, a longstanding Citigroup executive, was drafted in as US chief executive in October 2019 to lead the drive. Within a few months HSBC announced it was closing 30 per cent of its US branches.

The Fed’s rate cut put further pressure on HSBC’s American business, with the division making a pre-tax loss of $518m in the first three quarters of 2020. The rising losses have prompted the bank’s board to consider exiting the US retail market entirely.

The need to invest in HSBC’s Asian operations has put the underperforming US franchise in the spotlight at group level. “It’s not that anyone sees the US as the future, it’s that it’s important to get it right [to free up capital],” said a person involved in the discussions.


Spanish lender BBVA was offered a tantalising escape route from the US retail market last month when PNC offered to pay $11.6bn for the 637-branch operation.

Shareholders rejoiced at the all-cash deal, which represented 20 times the business’s 2019 earnings, with shares rising 15 per cent the morning after the deal was announced. The transaction will allow Spain’s second-biggest lender to improve its capital position, pursue transformational domestic acquisitions and leave a market that had failed to live up to expectations.

BBVA’s US foray was the culmination of a series of acquisitions, most notably its $9.6bn purchase of Compass Bancshares in 2007 — just before the subprime bubble burst — and Guaranty Bank in 2009. The Spanish bank focused its attention on the Sunbelt states, notably Texas, owing to its ease of doing business, favourable tax system and diversified, growing economy.

BBVA also hoped to capitalise on its large presence in the Mexican market and benefit from cross-border transactions to its branch network in the southern states.

But for several years, the US business has been a drag on group profits. “The line that was more challenging to manage was cost,” said Javier Rodríguez Soler, chief executive of BBVA USA. “Running a bank in the US [requires] having very strong compliance, a very strong legal structure and good systems. That makes us a sound bank, but that is expensive.”

Mr Soler, who two years ago replaced Onur Genc, BBVA’s current group chief executive, said the business invested heavily in technology and people, which had reduced the unit’s return on equity.

He added the investment BBVA had made in its US business was one of the main reasons PNC offered such an attractive price.

BBVA also lacked scale in the US to compete with bigger regional players. When PNC combines its $462bn of assets with BBVA’s $104bn it will become the fifth-largest US lender.


BBVA’s Spanish rival Santander has had a tougher time in the US. According to one former executive, it has been “outmanoeuvred” by its domestic competitor’s deal with PNC as it should have lined up such a favourable exit itself.

Santander’s US retail banking operation is separate from its more profitable consumer finance division, which was hit by a $550m settlement this year to resolve claims of deceptive lending.

But it is the US retail bank that most concerns its shareholders. It has just broken even or has been lossmaking in recent years and contributed to the group’s first loss in its 163-year history this summer.

“The US has been the million-dollar question for them,” said Ignacio Cerezo, an analyst at UBS. “Santander would clearly consider selling its US retail bank and come out with capital release similar to BBVA’s, but that does not look possible.”

Santander entered the US market in 2006, buying a 20 per cent stake in Boston-based Sovereign for $2.4bn. It bought the rest of the business two years later, at the height of the financial crisis, and was immediately hit by losses on auto loans and investments in Fannie Mae and Freddie Mac, the government-backed mortgage companies.

Santander’s US operations include 620 branches focused on the north-east and $142bn of assets. As a mixture of retail and private banking, investment banking and consumer finance, they are often criticised by investors for lacking a strategic focus.

A senior executive said the group acknowledged the need to “rebalance” its US business, where its consumer lending operations are more profitable and bigger than its banking activities — the opposite of its profile in Europe. Rather than pulling out, Santander’s management team has therefore prioritised investing in its US business and expanding.

“We still see the US as strategic because it is a developed market with growth, by contrast with Europe, where the bank has little growth,” the executive added.

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