There's clearly little appetite out there to take supply out of the region's approximately 6,000-firm banking sector, even if it would mitigate the pain of negative rates and sluggish economies. Just look at how few deals there have been recently. This year, completed transactions targeting a Western European bank stand at a grand total of $132.2 million, a drop of almost 99 percent year-on-year, according to Bloomberg data. The volume of deals involving North American and western European banks in the past six years has been less than half that of the previous six, according to Bloomberg News.
There are, of course, good reasons why you wouldn't want to bite the bullet in this environment. Euro zone bank shares are trading at about half their book value, which should mean there are bargains. But if your own stock is in the toilet too, then there's limited appeal in trying to buy rivals using shares. It's also hard to pitch an optimistic story to investors about a "transformational" merger when the outlook is this awful. Euro zone bank earnings have fallen 80 percent since the end of 2007 and analysts estimate a 9 percent drop this year. Don't forget the execution risk on top.
The biggest obstacle, though, is regulatory. Nowhere is this more obvious than Italy, a market overrun with some 650 banks and saddled with a non-performing loan ratio that's among the worst in Europe. Earlier this year, it saw its biggest bank deal since 2007 when two cooperative firms agreed to merge. But what surprised investors was ECB pressure for a 1 billion euro capital increase to support the combined entity, which damped any celebration and created higher hurdles to getting the deal done. The ECB's top banking supervisor, Daniele Nouy, made clear that she didn't just want any old merger, but only new entities that were "strong from the very beginning." In the real world, that means investors and CEOs fear dilution whether banks stay alone or get hitched.
We've argued before that even desperate-looking deals such as a tie-up between Deutsche Bank and Commerzbank deserve to be looked at given the suffering at Europe's lenders. But to encourage banks over that merger bridge, whether for domestic or cross-border deals, will need more carrot and less stick. And that ultimately depends on the ECB, even as it calls on banks to take more responsibility for their own problems. Draghi may well want to shrink the finance sector, but his own organisation isn't helping.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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