Europe Banks to Start Merging to Combat Meager Profits, UBS Says

(Bloomberg) -- Some of Europe’s biggest banks will start to merge in order to fend off a toxic combination of low interest rates and an increase in soured loans, according to analysts at UBS Group AG.

While bank deals are hovering near record lows in 2018, this should change in Europe as profitability remains under “significant pressure,” analysts led by Jason Napier wrote in a note to clients Monday. Banks face a likely increase in bad loans and are reliant on central banks raising interest rates to boost their income, they wrote.

“The strategic pressures to act are mostly driven by vulnerabilities,” the analysts wrote. “Bank sector returns could fall materially from current levels, leaving strategic plans, share prices and the financial system vulnerable.”

Speculation has swirled this year around mergers between some of the continent’s biggest banks as they continue to struggle with costs, new rules and the legacy of past strategic missteps. Deutsche Bank AG Chief Executive Officer Christian Sewing, whose own lender has been linked to a possible merger with local rival Commerzbank AG, said Aug. 30 that “the pressure to consolidate will rise significantly.”

Media reports this year have flagged discussions between UniCredit SpA, the largest Italian lender, and France’s Societe Generale SA, given that UniCredit’s top executive has held senior roles at both institutions. In the U.K., reports have speculated about a tie-up between Barclays Plc and Standard Chartered Plc. Deutsche Bank Chairman Paul Achleitner spoke with top shareholders and key government officials about possibly combining with Commerzbank, Bloomberg reported in June.

Under UBS’s forecast for 2019, at least 17 banks across the continent -- including UniCredit, Standard Chartered, Barclays, BNP Paribas SA and Deutsche Bank -- will produce returns on tangible equity, a measure of profit, of less than 10 percent. Bank executives will seek deals to drive up these returns rather than to expand into new territories or product lines, according to the analysts.

“We expect to see more deals done to boost profitability, or reset faltering strategic plans, rather than to broaden footprints or increase diversity,” the UBS analysts wrote. “Deals done for improved returns are no bad thing.”

©2018 Bloomberg L.P.