Local Deals Trump Mega-Mergers in Hunt for EU Bank Champions

An expected wave of European bank consolidation will be driven by local mergers rather than the kind of headline-grabbing, cross-border deals many see as necessary to creating regional champions.

That’s because weak stock prices in the sector are curtailing the fire-power required for lenders to pull off truly transformational deals, advisers say. A fragmented regulatory landscape and risks associated with sovereign debt exposure could also keep tie-ups within national borders.

“There is a sense in some boardrooms that share prices have to improve before making major strategic moves,” said Andreas Lindh, co-head of JPMorgan Chase & Co.’s financial institutions group in Europe, the Middle East and Africa. “No one wants to act from a position of weakness.”

Bank valuations in Europe remain near historic lows, with lenders battling rock-bottom interest rates and costs linked to regulation, restructurings and aging technologies. At the same time, Wall Street firms have continued to assert their dominance at home and abroad.

Local Deals Trump Mega-Mergers in Hunt for EU Bank Champions

All of this has seen regulators and executives at the likes of Deutsche Bank AG, UBS Group AG and Intesa Sanpaolo SpA soften to the idea of more radical mergers that might create behemoths to survive and thrive in the decades to come. Advisers remain skeptical about the reality of such deals.

“I try to be an optimist but I don’t see the case for large European bank consolidation with a cross-border angle in the short-term,” said Stefan Wintels, global co-head of the financial institutions group at Citigroup Inc. “Many roadblocks have not disappeared.”

One such roadblock is the lack of a shared regulatory framework for banks looking to bring their businesses together in different jurisdictions. The banking union, a brainchild of European policy-makers aimed at building a more consistent set of rules in the bloc, has been slow to progress since its conception in the wake of the 2008 financial crisis. The creation of a common deposit insurance scheme, one of the initiative’s three tenets, has been mired in political dispute and its absence cited as an obstacle to cross-border deals.

“Cross-border consolidation is more complex given the lack of regulatory harmonization and insufficient progress on the banking union in Europe,” said Lindh.

Exposing a balance sheet to a glut of riskier government debt held by a merger partner in a different country is another hurdle for industry leaders to consider. Banks have been encouraged to buy up sovereign bonds during the Covid-19 pandemic, potentially leaving them more vulnerable to writedowns in any future souring of Europe’s fragile economy.

“Put your investor hat on,” said Wintels. “What you don’t want is to combine two banks with different return and risk profiles.”

Staying Local

Instead, banks look set to pursue the kind of local transactions that have defined the recent wave of deals in the sector. The value of banking deals involving European parties over the last six months stands at $61 billion, up 59% year-on-year, according to data compiled by Bloomberg.

Volume has been driven by mergers including those of CaixaBank SA and Bankia SA and Unicaja Banco SA and Liberbank SA in Spain, with banks preferring to seek cost synergies in home markets. Spain’s Banco de Sabadell SA also remains open to deals, while France’s Societe Generale SA and Germany’s Commerzbank AG have been touted as candidates for consolidation.

“The industrial logic is still very clear,” said Lindh of the need for mergers. “Some European banks have cost bases that exceed their market capitalizations, making the value creation maths very compelling.”

Another potential trigger for M&A could be European governments looking for new owners for their post-financial crisis bank holdings. Germany still has an interest in Commerzbank, while the Netherlands retains its stake in ABN Amro Bank NV.

The European Central Bank, meanwhile, has been doing its bit to grease the wheels of dealmaking by indicating it won’t block credible mergers that could help the beleaguered industry and boost the wider economy. Among its recent guidance, the ECB has said combined banks won’t automatically face higher capital requirements. It has also said that any gains booked from an accounting quirk known as badwill should be used to shoulder the costs of a transaction, rather than pay out profits to investors.

Large deals aside, ECB restrictions on what lenders can return to investors via dividends and share buybacks -- put in place during the Covid-19 pandemic -- could force CEOs to explore other ways of deploying capital. Intesa Sanpaolo is among those most affected by the limits and is already looking at small acquisitions in wealth management and private banking, Bloomberg News reported this month.

“There will be a temptation to look at bolt-on acquisitions instead,” Lindh said.

©2021 Bloomberg L.P.

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