(Bloomberg) -- Andrea Orcel’s knack for dealmaking was on full display this week when he caught the world of finance by surprise with a move to buy some and possibly all of Commerzbank AG.
If he succeeds with the latter, it would mark his biggest takeover as UniCredit SpA chief executive officer and crown his career with the European Union’s largest cross-border deal since the financial crisis.
The broader question for many bankers is whether it might also unlock other long-mooted deals in a European market that remains highly fragmented, and where many lenders are too small to compete with Wall Street giants and fund Europe’s ailing economy.
“Banking sector M&A historically has been triggered by momentum from deals being announced,” said Kian Abouhossein, an analyst at JPMorgan Chase & Co. “We would expect more newsflow on European bank M&A going forward.”
More than three decades after the establishment of a single market for goods and services in Europe, banking remains one of the areas that has yet to live up to that promise. Executives and policymakers agree cross-border consolidation is needed so that Europe can finance the massive investments needed to compete with the US and Asia, and which a recent report put at €800 billion ($887 billion) extra a year.
But national interests have prevented key steps such as the creation of a single deposit insurance system that would make it easier for a bank to fund loans in one country with money from another. Berlin’s icy reaction to Orcel’s gambit — and that of a labor representative on Commerzbank’s board — speaks to the political hurdles still facing any cross-border bank deals, where jobs and national pride is at stake.
For Orcel, who during his years as investment banker worked on many of the large transaction in European banking, such skepticism shouldn’t come as a surprise. Many national governments had to use taxpayer money during the financial crisis of 2008 to bail out lenders that had made huge gambles in other parts of the world.
Cross-border bank deals in Europe hit their record just before the crisis, in 2007. That year, a consortium including Banco Santander SA, Fortis and Royal Bank of Scotland Group Plc agreed to buy Dutch bank ABN Amro. When markets collapsed shortly after, the UK was forced to bail out out RBS, while the Netherlands bought units of Fortis. Santander was advised by Orcel at the time.
A decade and a half later, Orcel’s move for Commerzbank is the first ambitious and tangible step toward cross-border integration since the crisis. The Italian banker didn’t wait for Berlin to sign off on his plan, or for regulators or governments to hash out their differences over the creation of a banking union.
It’s not the only indication that dealmaking in European finance may bottom out. In 2020, Italy’s Intesa Sanpaolo SpA snapped up smaller domestic rival Unione di Banche Italiane SpA. The same year, Spain’s CaixaBank SA agreed to buy Bankia SA to create the country’s largest lender, acquiring most of the stake from the Spanish government.
Last year, UBS Group AG agreed to rescue Credit Suisse in a government-brokered deal. Switzerland, however, isn’t part of the euro zone and could deal with the Credit Suisse failure at a national level, without all the potential complications that buyers would face in a cross-border transaction.
This year, the value of announced deals with banks as targets has already risen to $25 billion in Europe so far, surpassing the $11.4 billion for all of last year, according to data compiled by Bloomberg. Combinations, however, have been either relatively small or national in scope. BBVA’s hostile bid for Sabadell is such an example. And while domestic, it still faces multiple obstacles.
Helping fuel transactions is the fact that the rapid rate increases by the European Central Bank over the last two years have made banks a lot more profitable. In 2023, the 20 largest banks in Europe reported net income that surpassed the all-time highs seen before the financial crisis 15 years ago, according to Benjamin Goy at Deutsche Bank AG.
The shares of some European banks are now trading again above the value of assets on their books, which should make it more attractive again for executives to look at buying rivals, rather than repurchasing stock.
As interest rates start to fall again, they’ll have to prepare for leaner times through steps including deals, said Nicolas Desombre, who chairs Citigroup Inc.’s financial institutions group for Europe, the Middle East and Africa.
“With growth and rates going down in Europe, the only way to grow the bottom line is through innovation, efficiency and scale through consolidation,” he said. “CEOs of financial institutions now see a greater urge to act strategically.”
That’s dividing the landscape into potential buyers and targets. UniCredit, Italian peer Intesa Sanpaolo SpA and France’s BNP Paribas SA have long been seen as acquirers given their financial strength. ABN Amro Bank NV, which is still majority owned by the Dutch government, and Societe Generale SA are among firms being touted as potential targets.
Given the hurdles, domestic consolidation and targeted acquisitions of adjacent businesses remain the most likely scenario if deals pick up. Even for UniCredit, a Commerzbank takeover is appealing above all because the Italian lender already has a unit in Germany, and could reap the benefits by simply combining the two on a national level.
Still, in an industry defined by its animal spirits, there’s a chance that the surprise announcement might kickstart other blockbuster moves across the region.
UniCredit’s move also opens a strategic conundrum for Deutsche Bank. If UniCredit bought Commerzbank, it would surpass Deutsche Bank in its own home market. Deutsche Bank and Commerzbank already held merger talks in 2019, but those fell apart over risks involved, shareholder pushback and concerns of labor representatives.
Earlier this year, Deutsche Bank again stepped up internal liberations for potential deals, with Commerzbank and ABN Amro high up on its list of possible target that would match its ambitions, Bloomberg had reported.
“We need large European banks because European companies are increasingly dependent on US banks and private credit players,” said Elie Farah, an adviser who leads the European financial-services practice at Oliver Wyman. “The banking landscape is too fragmented.”
--With assistance from Ben Scent and Fion Li.
©2024 Bloomberg L.P.