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Breakingviews

Breakingviews - Europe’s banks smother their fund offspring

The headquarters of the Deutsche Bank is pictured in Frankfurt, Germany, March 19, 2018.

LONDON (Reuters Breakingviews) - Overzealous parents sometimes inadvertently hold children back. Deutsche Bank, UBS and others similarly risk smothering their asset management units in a too-tight embrace.

Europe’s money managers are puny when compared with U.S. giant BlackRock, which manages assets worth $7.3 trillion. The region’s biggest player, Credit Agricole’s Amundi, oversees one-quarter of that amount. Deutsche’s DWS and the eponymous units of UBS, Credit Suisse, Natixis and BNP Paribas are smaller still.

That makes them vulnerable as investors embrace low-cost index and exchange-traded funds. Mid-sized asset managers struggle to produce better returns from actively managed products and can’t lower charges as far as the U.S. giants. No wonder shares in Frankfurt-listed DWS trade at a 41% discount to BlackRock, on a multiple of 2021 earnings.

The logical solution is M&A, but bosses like Deutsche Bank Chief Executive Christian Sewing are reluctant to sell. Few banks want to cede control of a division that brings in steady fees and consumes little capital when low interest rates are sapping lending revenue. Asset management subsidiaries are also useful when planning for possible future crises with regulators. If necessary, owners can sell the divisions to raise capital and cover losses elsewhere. Finally, they’re good businesses: DWS generated an 18.1% return on tangible equity for Deutsche last year, while its parent made a loss.

This means banks only part with their asset management divisions when they have to. UniCredit, for example, sold Pioneer to Amundi for 3.5 billion euros in 2016 to replenish its capital levels. Though Chief Executive Jean Pierre Mustier kept some of the fee income through a distribution agreement, the lack of a wholly owned asset manager is one reason the Italian bank’s returns trail those of local rival Intesa Sanpaolo. It’s therefore unsurprising that UBS and Deutsche last year abandoned talks to merge their fund units. Neither had a pressing reason to sell, and both wanted to keep control.

The passive-investing revolution may force banks’ hands. Lenders often distribute their own funds through their branches, limiting fee pressure. Nevertheless, Morningstar reckons European exchange-traded funds will double to 2 trillion euros by 2024. According to Refinitiv Lipper, BlackRock’s iShares has about half the European market, and it would take a merger of the next nine providers to match its scale. Banks’ tight grip is stunting their offspring’s growth.

Breakingviews

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