Cross-border mergers

Europe’s banking consolidation conundrum

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Can't blame Unicredit's Jean-Pierre Mustier for not wanting to share that view. Source: Handelsblatt/Nicolo Lanfranchi

It was just last week that French central bank governor François Villeroy de Galhau called for a reduction in regulatory hurdles to encourage cross-border bank mergers. “In 2018, we should continue our efforts to encourage consolidation in the European financial sector,” he told journalists in Paris.

Such calls for Europe’s banks to consolidate are growing. It’s seen as crucial to completing the euro zone’s banking union, the plan launched in 2012 to reduce financial risks through common supervision, rules and guarantees across the 19-nation bloc.

To be sure, everyone agrees that Europe has too many banks. Megamergers, in theory at least, would make them more profitable, stable and render the euro zone more resilient to financial crises.

But therein lies the problem. Many bankers around Europe believe the time isn’t ripe, because too many banks are still saddled with problems, like bad debt, from the financial crisis. National regulators have warned that banks need to get their own house in order before they can start considering mergers.

In overbanked Germany, home to chronically underperforming flagship lender Deutsche Bank, the conundrum is particularly obvious. If you’re thinking that Germany’s largest bank could soon merge with its second-largest, Commerzbank, don’t hold your breath.

A merger now would amount to emergency open-heart surgery, not the creation of a sustainable European banking champion.

Deutsche Bank’s share price is hovering near record lows due to doubts about its strategy, compounded by a ratings downgrade by S&P last week. The country’s number two, Commerzbank, is in better health but still well below Europe’s par. Together their market value is not even half of France’s BNP Paribas. That makes both a relative snip to any predator.

The fact is, 10 years after the financial crisis, neither bank has managed to earn a consistent profit. Some of the problems are homegrown, but some of it is certainly due to Germany’s competitive banking market, where 40 percent of the private client business is dominated by a network of 300-odd savings banks.

The two big banks flirted with the idea of a merger in the summer of 2016, but agreed at the time that they needed to solve their own problems first. Those problems haven’t really become any smaller in the meantime. Though analysts continue to speculate on how it might work, a merger now would amount to emergency open-heart surgery, not the creation of a sustainable European banking champion.

Elsewhere doesn’t look any more promising. The latest speculation involves Italy’s flagship bank Unicredit and French rival Société Générale, which are said to be exploring a merger. While both banks are healthier than their German counterparts (see graphic below), the hurdles are as much cultural as they are financial.

08 p34 Commerzbank-01

On the face of it, a Franco-Italian merger makes sense. Société Générale was hit by the financial crisis and investment bankers believe it’s too weak to survive on its own in the long term. Jean-Pierre Mustier, CEO of Unicredit, is a Frenchman and former head of SocGen’s investment banking business, and has long supported consolidation in Europe as a political necessity.

Together they’d become a financial giant with a strong presence in Italy, France, Germany, Austria and Eastern Europe. “A merger of the two banks would be a good fit because they have a similar structure and size, particularly in investment banking,” said Michael Hünseler, director of asset manager Assenagon. Unicredit currently has a market valuation of around €33 billion ($39 billion) compared with Société Générale’s €31 billion. “A bank of that size would have weight in a market dominated by US banks,” Mr. Hünseler said.

Yet both have strongly denied the speculation that they are in talks. Sources said Mr. Mustier has doubts about French banks in particular because he regards them as too bureaucratic and subject to political influence. To dampen the mood further, the US Department of Justice on Monday said Société Générale will pay over $860 million to resolve criminal charges in the US and France.

On the other side, the chairman of Société Générale, former European Central Bank board member Lorenzo Bini Smaghi, reinforced the merger denial by referring to Italy’s current political crisis and new euroskeptic government. “It’s difficult to understand why these reports are circulating, especially at this particular moment,” he told Handelsblatt.

So both banks will go back to getting their own house in order instead. Mr. Mustier has said repeatedly that Unicredit wants to focus on organic growth at least until 2019. Société Générale said it was concentrating on strengthening its own business. Europe, it seems, will just have to wait.

Handelsblatt correspondents Michael Maisch in Frankfurt, Regina Krieger in Italy and Thomas Hanke in France contributed to this story. David Crossland and Christopher Cermak contributed and adapted the article for Handelsblatt Global. To contact the authors: Cermak@handelsblatt.com

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