As two potential big bank mergers — both hostile, one cross-border — hang in the balance, Mario Draghi and the editorial boards of the FT and Bloomberg call for a fresh round of European bank consolidation.
The last time two large banks merged in Europe was in March 2023, when a reluctant UBS took over its failing domestic rival, Credit Suisse. The fast-moving fallout from the bank collapses in the US had tipped the chronically mismanaged Credit Suisse over the edge. The resulting shotgun merger was Europe’s first ever tie-up between two officially Too-Big-to-Fail lenders, and while it may have steadied the ship, for now, it also served as a timely reminder that, to quote Satyajit Das, strong capital and liquidity ratios count for little when panicked depositors take flight.
Fast forward to today, two proposed bank mergers — both hostile, one cross-border — hang in the balance. In the first, Italy’s second largest bank, Unicredit, is looking to take over Germany’s second largest, Commerzbank. Both lenders were in dire straits just a few years ago, with Unicredit even losing its status as a global systemically important bank (G-SIB), but appear to have more or less stabilised. In the second, Spain’s second largest bank, BBVA, seeks to buy out its domestic rival, Banco Sabadell.
Thinning the Herd
Both mergers have been tried before, with no success, but that doesn’t prevent them from being tried again. In the case of BBVA’s proposed takeover of Sabadell, it faces strong opposition from the national government in Madrid. But it has received the blessing of the European Central Bank, which has long favoured thinning the herd of banking players in the Euro Area. For its part, Unicredit has solicited ECB approval to own up to 30% of Commerzbank, potentially triggering a full buyout deal. The answer from the ECB is likely to be “yes”.
Senior ECB representatives have persistently sought to reduce the number of small and mid-sized banks in the Euro Area. In September 2017, Daniele Nouy, the then-Chair of the ECB’s Supervisory Board, partly blamed the low profitability of large lenders on the fierce competition from smaller banks. Rather than lots of competition between domestic banks, what Europe needs, Nouy said, are “brave banks” that are willing to traverse borders and conquer new territory.
Current ECB Vice President Luis de Guindos recently reiterated this position:
“We are looking for an integrated European market, we lack the single deposit guarantee fund, which we are in favour of. And I think that the less cracked and fragmented the system is, in terms of national barriers, the more economies of scale can increase, boosting competition. Having large European banks is a fundamental part of this. European integration is stagnant and I think this would help spur it along.”
It may just do that, but the consequences are likely to be dire for Europe’s scloretic economies. As the German economist and small bank activist Richard Werner warns, economies with fewer and bigger banks will lend less and less to small firms, which tends to mean that productive credit creation that produces jobs, prosperity and no inflation, also declines, and credit creation for asset purchases, causing asset bubbles, or credit creation for consumption, causing inflation, become more dominant.”
In other words, more financialisation, less productive activity. In the eurozone, more than 5,000 banks have already disappeared since the ECB started business a little over two decades ago, according to Werner. And the central bank is determined to continue, if not intensify, this process.
In his recent report for the Commission on the state of EU competitiveness, former ECB Governor Mario Draghi blames European banks’ lower profitability and lending capacity vis-a-vis their US counterparts on their lack of scale. And the main reason for that lack of scale, he says, is “the [EU’s] incomplete Banking Union.” Incidentally, other key recommendations of Draghi’s much-feted report include other forms of unfinished EU business, from banking union to eurobonds, to debt mutualisation, to common bank deposit insurance…
The document argues that “a minimal step towards completing the Banking Union would be to create a separate jurisdiction for European banks with substantial cross-border operations that would be ‘country blind’ from the regulatory, supervisory and crisis management viewpoints.”
In other words, a partial banking union for the EU’s largest cross-border lenders. According to Bloomberg columnist Paul j Davies, “It’s a minimal reform that would need single, EU-level deposit insurance and resolution schemes for just the top 20 or so lenders”.
The idea already enjoys the full-throated support of the Financial Times and Bloomberg. In an column on Wednesday, Bloomberg‘s editorial board averred that “UniCredit’s Takeover Bid Should Be Welcomed by Europe.” Such a merger, they claim, could pave the way to “the financial union both Germany and Europe desperately need,” creating a bank that will be among the largest on the continent, with a bigger balance sheet and domestic revenues than Deutsche bank. Faced with such a threat, Deutsche Bank has threatened to buy up part or all of the German State’s remaining shares of Commerzbank.
🇩🇪 A combination of UniCredit and Commerzbank would create a European banking giant that would rank ahead of Deutsche Bank in terms of German revenue and will also surpass it in total assets
Officially, there is at the moment no firm timeline for the merger talks between the… pic.twitter.com/Awl8Vqb4Jk
— Nikolay Kolarov, CFA (@libertniko) September 17, 2024
For its part, the FT published an editorial calling on Europe to “unleash its banking union”:
Unicredit’s announcement last week that it had built up a 9 per cent stake in Commerzbank sparked a rare giddiness among European bank watchers. In the continent’s highly fragmented banking system, mergers are often confined to entities from the same country and lending activity is largely home-biased. Onlookers hoped the Italian bank’s move could pave the way for a deeper tie-up between Italy and Germany’s second-largest listed lenders, and kick-start consolidation across the bloc.
Former Italian Prime Minister Mario Draghi’s report into Europe’s economy estimated last week that the bloc needed to raise capital expenditure by €800bn a year to remain competitive. But a significant impediment to boosting investment is the lack of scale among the EU’s private lenders. For measure, JPMorgan Chase, the largest US bank, has a market capitalisation greater than the 10 largest EU banks taken together. In the banking industry, size matters. Larger banks can spread risk and benefit from cost efficiencies, which helps to generate higher profits and, in turn, more financing opportunities.
The US’ banking system seems a bizarre choice of example to follow — unless, of course, seen from the perspective of Europe’s big bank executives. After all, nowhere else on planet Earth have banks reached such levels of economic heft, theft and impunity. Profits and pay have done nothing but rise and rise, even through Wall Street-inspired crises that have destroyed trillions of dollars of value and untold millions of jobs around the world.
The mention of JPMorgan Chase is also interesting given the role the bank appears to have played in facilitating Unicredit’s allegedly unwelcome bid for Commerzbank. The US lender had been hired by the German government to help organise an auction of part of the stake the State held in Commerzbank. But apparently unbeknown to Berlin, JPM had invited Unicredit to participate in the auction, giving the Milan-based lender an opportunity to get its foot in the door. Unicredit took full advantage, buying up 100% of the State’s 4.5% stake. From the FT:
The sale on Tuesday in an after-hours auction enabled UniCredit to jump to a 9 per cent stake without previously disclosing any interest — something that could have pushed up the price.
The sudden move to become Commerzbank’s second-biggest shareholder — behind the government with its remaining 12 per cent — caught the German establishment off-guard, ignited public opposition to the sale of a strategic asset and put Berlin in an awkward position ahead of federal elections next year.
Before this month, Berlin repeatedly signalled to UniCredit and European rivals circling Commerzbank that it was not interested in selling to them.
Instead, it wanted to sell its stake in small portions to financial investors, according to people familiar with the deliberations, but EU bailout rules barred it from discriminating against strategic bidders…
The Italian bank, headed by experienced dealmaker Andrea Orcel, had by the time of the auction on Tuesday accumulated a 4.5 per cent stake through derivative transactions that fell below the threshold for disclosure.
In other words, Unicredit has surreptitiously accumulated 9% of Commerzbank’s stock, at a reasonably low price, and now appears to intent on acquiring a controlling stake in the bank. “For the moment, we are only a shareholder. But a merger … could lead to considerable added value for all stakeholders,” Unicredit CEO Andrea Orcel told Handelsblatt.
The Germany government insists it was blindsided by Unicredit’s moves, but opposition parties and trade unions are fuming — for good reason: Commerzbank has more than 42,000 staff, 25,000 business customers, many of them belonging to Germany’s celebrated Mittelstand – the mid-sized companies that are considered the cornerstone of the economy — and is responsible for almost a third of German foreign trade payments. Back to the FT:
On Monday, Matthias Hauer, a head of the opposition CDU/CSU group on the parliamentary finance committee, urged the government “to dispel the suspicion that it has lost control of the sales process”.“
Given the importance of Commerzbank for (Germany’s) financial centre, it is important that strategic interests are taken into account,” Hauer added.
Fabio De Masi, an MEP for new far-left opposition party Bündnis Sahra Wagenknecht, said: “Since the global financial crisis, we have known that there is stupid German money but now we have learnt that there are also stupid German ministries.
“It beggars belief that decision makers in Berlin accidentally kick off a banking merger,” he added.”
Given how much damage the Olaf Sholtz government has already inflicted on the German economy in just three years, none of this should beggar belief, including the possibility that the government intentionally opened the door to Commerzbank’s sell-off.
A few months ago, French President Emmanuel Macron said he would be perfectly happy for a bank from another European country to buy up a French one (the interviewer offered the example of Santander merging with Société Générale). “It’s part of the market,” he said. “But (above all because) acting as Europeans means that it is necessary to consolidate as Europeans.”
Madrid vs ECB
Meanwhile in Spain, BBVA, Europe’s ninth largest bank by assets, is determined to expand its share of the Spanish market by taking over the smallest of Spain’s big four lenders, Banco Sabadell. BBVA announced its latest bid in May, which was rejected outright not only by Sabadell’s management but also by the Spanish government. BBVA responded by taking the bid hostile, placing itself at loggerheads not only with Sabadell’s management but also Spain’s Pedro Sánchez government.
As an op-ed in Euro Money reports, “hostile bank M&A deals are rare, especially in Europe, as they make due diligence so much harder”:
Given the power of regulators in banking, if a host government so much as hints at its opposition, acquirors will often back off.
But there are examples of successful hostile bank M&A deals in the sector: most recently Intesa San Paolo’s takeover of UBI Banca.
Bankers on both sides of the BBVA-Sabadell deal say that once a bid like this is launched, the state has less influence over the situation unless there are compelling competition or prudential reasons to block it.
The Spanish government insists that is the case. Spain’s banking industry, it says, is already concentrated enough, with the four biggest lenders — Banco Santander, BBVA, CaixaBank, and Sabadell — controlling around 70% of the retail banking space. Before the 2008 financial crisis, the country was home to 45 savings banks and a dozen commercial banks. Now there are barely ten large or mid-size lenders left.
A BBVA-Sabadell tie up would not only further erode competition in an already heavily concentrated financial sector, with all the ugly implications that entails (including more cartel-like behaviour, higher risks of big bank implosions, and the inevitable closure of even more bank branches and ATMs, making accessing cash even harder, just as the big banks intend), it is also likely to impact the banking services available to small businesses. After all, Sabadell is Spain’s largest lender to small and medium-size enterprises.
“We are talking about excessive concentration within this sector and this has potential effects for customers, for example, in how their deposits are remunerated,” said Carlos Cuerpo, Spain Minister of Economy, at an event on Friday. The minister recalled that over the past two years the ECB’s sharp rise in interest rates has not led to a commensurate rise in deposit rates, as it did on previous occasions:
“The Bank of Spain itself points out that, in part, this is due to a possible absence of competition or excessive concentration, and this is before an additional merger between two of the large Spanish banks takes place.”
While the Spanish governments faces off with BBVA over its attempted hostile takeover of Sabadell, executives at Sabadell insist that BBVA’s current bid offers little value to its shareholders. Also, in an effort to frustrate BBVA’s takeover bid, Sabadell is refusing to disclose not only the non-public information that BBVA has requested to draft the prospectus of the hostile takeover but also data that it has willingly disclosed for years, including the proportion of shares held by individual and institutional shareholders.
To go ahead, the operation will also need the approval of Spain’s market and competition regulators, which could take months to materialise.
The Obstacles to Big Bank Mergers
As already mentioned, both of these proposed mergers have already been considered before, and they came to nothing. As even the FT notes, there are multiple reasons why:
European governments that had to bail out international lenders during the crisis have been more cautious about cross-border mergers.
[NC: What the FT doesn’t mention is that some of the big banks created by cross-border mergers during the pre-crisis years were among the biggest casualties during the crisis — including, of course, RBS and Monte dei Pacshi di Senna, both of which are still heavily state-owned.]
There is often also a desire to support domestic champions and to protect provincial banking networks.
Banks attempting to expand beyond their national borders also have to navigate reams of red tape, including differences in tax, accounting and insolvency regimes, labour laws, and securities markets. This helps to explain why both cross-border lending and mergers are subdued. European banking authorities have a reputation for being more restrictive than their international peers, too.
Another thing the FT doesn’t mention are the IT challenges of making cross-border mergers work. As we have discussed here on a number of occasions, merging two banks’ often creaking IT systems can be a nightmare. One of the best examples of this, ironically, was Sabadell’s bungled attempt to merge its “state-of-the-art” IT system with that of its recently acquired British subsidiary, TSB. From out Dec 3, 2020 post, This Is What Can Happen When a Cross-Border Bank Merger Goes Horribly Wrong:
Branded the “biggest IT disaster in British banking history,” the botched IT upgrade led to hundreds of thousands of customers being unable to access their online accounts for weeks on end. Standing orders, payrolls, mortgage instalments and other payments and transfers failed. Thousands of customers fell victim to fraud attacks. Even when the bank tried to apologize, it sent apologies out to the wrong people, in the process breaking the EU’s new data protection laws.
As our in-house bank IT specialist Clive commented for that post, “while central banks and regulators may see the upsides in bank mergers, perhaps as stealth recapitalisations for failed or failing institutions, or an attempt to create larger entities to compete on the global stage (notwithstanding how many times that has been shown to be little more than a pipe dream) or even to try to keep all their problems in one place to better keep an eye on them, few have any real knowledge of experience of what a bank merger entails as a practical exercise.”
This is one of many reasons why cross-border bank mergers tend to fail so badly, particularly in Europe — often with extortionate repercussions. Orcel should know this better than just about anyone given his previous role as architect of some of the worst European bank marriages during his time at Bank of America – including RBS’s catastrophic takeover of ABN Amro and Monte dei Pacshi di Siena’s disastrous acquisition of Antonveneta, which culminated in the failure and bailout of both RBS and MPS, the costs of which are still stacking up today.
