Commerzbank Back in Play Could Trigger a Round of European Bank Mergers

(Bloomberg) -- The collapse of a potential Deutsche Bank AG-Commerzbank AG combination sets the stage for an era of matchmaking by European financiers.

Commerzbank -- the smaller of the German lenders -- represents a possible target for ING Groep NV and UniCredit SpA. The largest euro zone banks by market value, Banco Santander SA and BNP Paribas SA, could also get into the contest.

European executives and policy makers have continuously emphasized the need for bank mergers to take on the U.S. behemoths that have taken market share since they rebounded from the financial crisis a decade ago. While politics and regulatory hurdles have prevented significant cross-border moves, Commerzbank seen as now being in play could be a catalyst.

“Consolidation seems inevitable," said Alex Eventon, a portfolio manager at Resco Asset Management, a hedge fund in London. “I don’t think it is specific to Commerzbank. It will be the elephant in bank boardrooms across Europe."

ING, BNP Paribas and UniCredit declined to comment, while a Banco Santander spokesman wasn’t immediately available to comment.

It’s not just banks. UBS Group AG is willing to look at large-scale merger opportunities, Chief Executive Officer Sergio Ermotti said on Thursday, underscoring speculation of a tie-up between his asset-management business and Deutsche Bank’s DWS Group.

Political Baggage

Any campaign to take over Commerzbank comes with plenty of political baggage. The German Finance Ministry, which oversees the country’s roughly 15 percent stake in Commerzbank, had encouraged the negotiations with Deutsche Bank to forge a stronger national lender.While politicians in Germany criticized the deal, the lack of a European deposit insurance scheme and a still-fragmented capital market in the region pose big obstacles for a cross-border takeover. That’s why ING and UniCredit could be the top contenders, since both already have large operations in Germany.

ING Groep’s Ralph Hamers, who runs the biggest Dutch bank, has already reached out to his Commerzbank counterpart, Martin Zielke, and to the German government in an effort to start discussions, according to a person familiar with the matter.

ING already ranks among the biggest retail banks in Germany with more than 8 million customers, and its online-only strategy there might fit well with Commerzbank’s Comdirect business. A deal would also bolster ING’s push into corporate banking in the country. The potential to cut costs is lower because ING doesn’t have any branches there.

Less Cutting

Hamers even pledged to cut less headcount than the 30,000-job bloodletting a Commerzbank-Deutsche Bank deal would have required, and to move ING’s headquarters to Frankfurt from Amsterdam, according to Manager Magazin. Zielke rejected formal discussions but hasn’t broken off contact completely, the publication said.

Italy’s UniCredit has considered a bid for Commerzbank should talks with Deutsche Bank fall apart, Bloomberg News reported last week. The multibillion-euro plan under deliberation involves buying a sizable stake in Commerzbank and merging it with HypoVereinsbank, which UniCredit already owns, according to the Financial Times.

Possible Opposition

A takeover would probably face opposition from the German government because of UniCredit’s significant exposure to Italian sovereign debt, so a transaction would probably require a complex structure. UniCredit executives held discussions with German officials about Commerzbank in 2017, a person with knowledge of the matter said at the time.

Combining HypoVereinsbank with Commerzbank would give UniCredit -- or any other buyer -- greater access to the so-called Mittelstand companies, the mid-sized businesses that are the backbone of the German economy.

"What we are seeing now in the European banking industry is a lot of domestic consolidation discussions where regional lenders are increasingly looking to gain scale through M&A," Patrick Sarch, co-head of the law firm White & Case’s global financial institutions group and London corporate practice said.

‘Transformational Deals’

"When it comes to mega bank mergers, we see challenges ranging from political factors to systems integration, technology, regulatory and staffing issues which can be an impediment to large cross-border deals," Sarch said. "However, we are seeing an increase in the number of inquiries from big banks wanting to explore transformational deals. We may not see a flurry of them in Europe in the short term but there is enough appetite for one or two of those deals to happen in due course"

Like UniCredit, BNP Paribas is said to have held talks already in 2017 with the German government about buying its stake in Commerzbank. Santander executives would be interested in making an approach if they believe the price to be right, people familiar with the matter said.

Like ING and UniCredit, Santander is already present in Germany, and its focus on consumer lending could square with that of Commerzbank. Chairman Ana Botin has said that “consolidation is going to happen” though banks would need an integrated European market for services for cross-border banking to work. Botin didn’t specifically address a potential Commerzbank tie-up and a spokesman declined further comment.

Societe Generale SA is among European lenders that have weighed whether to make an approach to Commerzbank if German consolidation plans don’t succeed, a person familiar with the matter said. There’s no certainty the French lender will make an approach, the person said.

Earlier this month, SocGen Chairman Lorenzo Bini Smaghi said the bank “wants to be a protagonist” in European cross-border consolidation, which he said was important for financial stability of the euro area and to compete with U.S. rivals. His firm is the only one among France’s top three banks that doesn’t have a retail base in another euro-area country.

Read More:

• Deutsche Bank, Commerzbank End Talks on Historic Combination
• Glory Days to Failed Merger: Deutsche-Commerzbank Over 150 Years
• Germany’s Top Banks Weigh Unpalatable Options After Talks Fail
• Germany Needs a Plan B After Deutsche Bank Merger Deal Collapses
• Deutsche Bank Suffers in Credit Markets as Merger Talks End
• Deutsche Bank CoCo Falls After End of Commerzbank Merger Talks
• Why That European Bank M&A Wave Faces Huge Hurdles: QuickTake
• Deutsche Goes Back to a Cold, Dark Place: Hughes and Martinuzzi
• No Deal Better Than Bad Deal for Deutsche Bank: BI React

--With assistance from Jan-Henrik Förster, Steven Arons, Ruth David, Nishant Kumar and Dinesh Nair.

To contact the reporter on this story: James Hertling in London at jhertling@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Keith Campbell

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