A Frenzy of Bank M&A? Be Careful What You Wish For
(Bloomberg Opinion) -- For years, European banks, their regulators and stakeholders have hailed consolidation as the way to boost efficiency and profitability. Germany’s attempt to create a domestic behemoth will force others to review their options.
Unfortunately, though, the deal is unlikely to prompt the wave of the tie-ups that are really needed: cross-border deals. For that to happen, Europe needs a different set of rules. The risk is that the German tie-up triggers other defensive mergers among domestic rivals that push policy reform onto the back-burner.
Deutsche Bank AG and Commerzbank AG said on Sunday that they had started exploring a combination, without elaborating on what the new lender would look like. The combined bank is likely to be one of Europe’s top four by assets, but, crucially, will still lack critical mass in its home market. The top five institutions in Germany account for about 30 percent of the nation’s banking assets; in the U.S., the figure is more than 65 percent. With the market dominated by hundreds of public-sector savings banks and cooperative lenders, this deal won’t do much to change the competitive landscape.
What’s more, Europe’s failure to create a single financial services industry, the so-called banking union, means it remains difficult for firms to benefit from cross-border expansion. From the inability to move funds around freely to a lack of trust between nations, lenders cannot make the most out of growing outside their home markets.
Deutsche Bank Chief Executive Officer Christian Sewing wasn’t exaggerating when he said banking union is a precondition for consolidation among European lenders. Neither has really happened. In the euro zone, nations still run individual deposit insurance programs even though they share a common currency. While a single supervisor, the European Central Bank, oversees the biggest lenders, smaller firms are regulated by national agencies. And while the Single Resolution Board now oversees bank failures, firms are still subject to domestic requirements to hold funds locally in the event of a blow-up.
The quality of banks’ loan books is another reason buyers will move with caution outside their home markets. Take Italy, where banks are still groaning under the weight of bad loans. With the country sliding back into recession last year and yields on government bonds soaring, its lenders are a risky proposition for any investor, especially one from overseas.
Though the sovereign debt crisis exposed the perils of the link between government borrowing and the banks that owns those bonds, regulators have done little to break this toxic link.
The average European bank’s holdings of sovereign debt are about 170 percent of its core Tier 1 capital, more than triple the exposure at U.S. banks, according to Deutsche Bank research analysts. What’s more, about 60 percent of an average European bank’s sovereign bond holdings are of those issued by their home government. Why? Because government bonds carry zero risk weightings on banks’ books. This creates some perverse incentives. While they were staggering under the weight of bad loans, Italian banks used much of the funding the ECB provided to encourage banks to lend to companies to buy yet more sovereign debt.
National supervision and overriding local interests continue to hinder the creation of a truly single market for securities trading. Britain’s decision to leave the European Union will add to those barriers, exacerbating the fragmentation of Europe’s capital markets. Mergers in those circumstances won’t lower the expenses of splintered investment banks.
All that said, lenders in Italy and France could be tempted to accelerate their own domestic consolidation. Italy could do with a solid, third bank to compete with the top two. But mashing together a number of weaker lenders may only buy time without addressing the cause of their troubles. In France, BNP Paribas SA and Societe Generale SA struggle in their home markets, but a combination wouldn’t reduce their reliance on trading.
The worry is that following in Germany’s footsteps, there could be more defensive deals that don’t pay enough regard to the need to generate returns in the long term. That’s the last thing Europe needs.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
©2019 Bloomberg L.P.