LONDON (Reuters Breakingviews) – Overzealous parents sometimes inadvertently hold children back. Likewise, Deutsche Bank, UBS and others risk suffocating their AMUs in too tight an embrace.
European fund managers are puny compared to US giant BlackRock, which manages assets worth $ 7.3 trillion. The largest player in the region, Amundi du Crédit Agricole, manages a quarter of this amount. Deutsche’s DWS and the eponymous units of UBS, Credit Suisse, Natixis and BNP Paribas are even smaller.
This makes them vulnerable as investors move to low-cost index and exchange-traded funds. Mid-size asset managers struggle to produce better returns from actively managed products and cannot lower fees as much as the US giants. No wonder shares in Frankfurt-listed DWS are trading at a 41% discount from BlackRock, on a multiple of 2021 earnings.
The logical solution is mergers and acquisitions, but bosses like Christian Sewing, CEO of Deutsche Bank, are reluctant to sell. Few banks want to cede control of a division that earns stable fees and consumes little capital while low interest rates undermine loan income. Asset management subsidiaries are also useful in 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 companies: DWS generated an 18.1% return on tangible equity for Deutsche last year, while its parent company suffered a loss.
This means that banks only part ways with their asset management divisions when they have to. UniCredit, for example, sold Pioneer to Amundi for 3.5 billion euros in 2016 in order to replenish its equity. Although chief executive Jean Pierre Mustier retained some of the commission income through a distribution deal, the lack of a wholly-owned asset manager is one of the reasons the Italian bank’s returns. are inferior to those of his local rival Intesa Sanpaolo. So it’s no surprise that UBS and Deutsche dropped talks last year to merge their fund shares. Neither had a compelling reason to sell, and both wanted to stay in control.
The passive investing revolution can strain the banks’ hand. Lenders often distribute their own funds through their branches, which limits the pressure on fees. Still, Morningstar estimates that European exchange-traded funds will double to € 2 trillion by 2024. According to Refinitiv Lipper, BlackRock’s iShares has about half of the European market, and it would take a merger of the next nine providers to match its scale. The tight hold of the banks retards the growth of their offspring.
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