Cross-border European financial-services takeovers are unlikely to pick up in the next 18 months as regulatory change makes it harder for banks to allocate capital and tough market conditions persist, UBS AG said.
Basel III rules on bank liquidity and capital, combined with proposals from European Union officials last month that would put greater regulations on trading activities and bonuses, have created “uncertainties” for banks seeking deals, said Edouard de Vitry, co-head of financial institutions for Europe, the Middle East and Africa at UBS investment banking, said at a conference the bank organized in London today.
“Even the best European banks aren’t willing to commit capital to large acquisitions at the moment,” said de Vitry. “That’s not going to disappear before uncertainty of the regulatory landscape and progress of the euro zone is further established.”
Announced deals involving a European bank this year have dropped by more than a third to about $76 billion, data compiled by Bloomberg shows. Deutsche Bank AG said in June that it won’t sell its RREEF alternative asset-management unit to Guggenheim Partners LLC, six weeks after ending talks with the U.S. firm about the sale of three other asset-management divisions.
UBS, Switzerland’s biggest lender, ranks eighth among advisers on global bank mergers and acquisitions this year, according to data compiled by Bloomberg. The Zurich-based firm is exiting most of its fixed-income business to boost profitability at the rest of the investment bank.
A group led by Erkki Liikanen, a member of the European Central Bank’s governing council, presented a report on Oct. 2 that proposed forcing EU banks to push much of their trading activities into separately capitalized units. The separation rule would apply to banks with available-for-sale assets valued at more than 100 billion euros ($127 billion) or that amount to more than 15 percent to 25 percent of a lender’s total assets.
“It’s unlikely that we will see a massive wave of large, cross-border M&A transactions over 1 billion euros in the next 18 months or so,” de Vitry said. The deals that are taking place are on a “much smaller scale,” he said.
Royal Bank of Scotland Group Plc, the biggest U.K. state-owned bank, said last month that Spain’s Banco Santander SA pulled out of an agreement to buy 316 branches. That deal was valued at about 1.7 billion pounds ($2.7 billion) and coincided with increasing regulatory pressure on Spanish banks to bolster capital amid mounting real estate losses at home.
Some euro-region banks are more troubled than their U.K. counterparts because their deposit-to-asset ratios are lower and they have become too dependent on central bank financing, said Alistair Ryan, co-head of European bank research at UBS.
“U.K. banks are liquid, well-funded and extremely well-capitalized,” Ryan said at the briefing. “They were broken and they are now fixed. I think the euro area is very much behind that, partly because the ECB was so effective around 2007 and 2008 providing liquidity to the banks.”
Separately, Robert Ellison, UBS’s head of European debt capital markets for financial institutions, said there may be a third ECB longer-term refinancing operation next year.
“I think there will be an LTRO next year,” he said. “It will come earlier than people expect, and there will be some banks that are unable to wean themselves off” the central bank’s funding, he said.
In December and February, the ECB offered banks unlimited three-year loans after funding markets froze and yields on southern European government debt hit euro-era records. The move helped to reduce yields on both bank and government bonds.