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By Steve Slater
LONDON, April 24 (Reuters) - Deutsche Bank's expected moveto sell much of its retail banking business will see it join agrowing list of banks choosing to shrink and simplify tosurvive.
The benefits of size and reach, for years considered theholy grail of global banking, are now seen as being outweighed by the cost and complexity of running businesses across dozensof countries.
Many bank bosses have given up on trying to offer everythingto everyone. But as unwinding years of expansion provesdifficult, pressure for action has intensified, from politicianswho show little patience with institutions they consider too bigand complex and investors wanting more return on equity (RoE).
"The underlying economics for banks ... means being allthings to all people is too big a burden to sustain," said BillMichael, head of financial services in Europe at consultancyKPMG. He cited low RoEs, high operational risk and heftypotential costs from regulation.
After missing financial targets and racking up a raft ofregulatory fines and problems, Deutsche Bank's boardis expected to agree on Friday to sell retail arm Postbank and take a knife to its investment bank.
On the same day, HSBC's bosses responded toinvestor criticism over a string of misconduct scandals and weakprofitability by stressing how far they have shrunk andstreamlined the bank in the last four years. HSBC has alreadysold or shut 77 businesses and could yet dispose of bigoperations in Brazil or Turkey.
Credit Suisse's incoming CEO Tidjane Thiam isexpected to slash trading operations and pull back from otherareas, while Barclays chairman John McFarlane signalledon his first day on Thursday that he will also wield the knife.
The message is clear: bold action is on the cards to createleaner and simpler models, even after big cuts in recent yearsat Barclays, Credit Suisse, Citigroup, Morgan Stanley, UBS and Royal Bank of Scotland.
"NOT A SCRAP OF EVIDENCE BIGGER IS BETTER"
Pressure for banks to be cut down in size has built sincethe global financial crisis, which was preceded by a frenzy ofmergers and acquisitions of the kind that briefly made RBS oneof the world's biggest banks.
Bank of England chief economist Andy Haldane said in 2009"there is not a scrap of evidence of economies of scale or scopein banking -- of bigger or broader being better".
Politicians worry that large and complex banks can missproblems, struggle to instill a common culture and are just toohard to manage.
Efforts by some national regulators to limit capitaloutflows have also encouraged lenders to quit countries in whichthey lack scale.
Investors, too, are questioning the benefits of size as theylose patience with promises that returns will recover. Andvaluations reflect their preference for simpler firms.
Wells Fargo, which focuses mainly on U.S. retail andcommercial banking, is now the world's biggest bank by marketvalue. Its shares trade at 1.6 times book value, compared to anaverage for U.S. banks of close to book value.
Lloyds focus on UK retail and commercial lendinghas helped its shares trade at a big premium to rivals, whileDeutsche Bank trades at just 0.6 times book value, even after arally since its plans for an overhaul emerged.
"SYSTEMICALLY IMPORTANT"
The main challenge for bosses is how far to go.
Most banks want to continue offering a range of services --from personal savings accounts to takeover advice for companiesand telling rich clients how to invest -- but to fewer clients.
Some bankers argue that simplification reverses two decadesof globalisation that have benefited trade and finance, andcould leave just three truly global banks -- HSBC, JPMorgan andCitigroup.
JPMorgan has rejected calls for its breakup, saying scalehas always "defined the winner" in banking. It says not havingto duplicate audit functions or cybersecurity for the thousandsof clients that use more than one part of the bank saves it $18billion a year.
But demands that 30 'systemically important' banks hold morecapital, and the more intense regulatory scrutiny they face,also throw into question the benefits of scale.
The list of banks and their capital requirements are judgedannually on five criteria, including size, international reachand complexity.
Lloyds is not on the list and Wells Fargo's capitalsurcharge is 1 percent of risk-weighted assets, well below the2.5 percent HSBC and JPMorgan must hoard in case of losses -- inboth cases an extra $30 billion or more of capital.
One carrot from regulators is that surcharges can be reducedif banks simplify, as happened with UBS and Credit Agricole last year. (Editing by Catherine Evans)
