Davos Elite Eyes M&A Across Europe’s Struggling Banking IndustryBy , , and
Commerzbank, ABN may find themselves on the block, bankers say
BNP Paribas seen as suitor after stronger decade than rivals
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The rationale for merging some of Europe’s biggest lenders is compelling.
That’s the view of many financial executives who met at the World Economic Forum in Davos, Switzerland, last week. A decade after the financial crisis, some of the region’s biggest lenders are facing declining revenue as interest rates linger near record lows, while legal bills and capital demands have eroded profit.
Combinations of consumer-banking operations could help pare costs and fend off competition from fintech startups. And firms that are too exposed to volatile businesses, such as trading that consumes more capital, could bolster returns by diversifying and adding steadier and higher-margin activities.
Some banking leaders say that European regulators are warming to the idea of mergers, fueling speculation that deals are drawing closer, even if they are not a sure bet for 2018. Others say regulators’ greater capital demands of larger firms still make banking mergers improbable. Bringing together two investment banking cultures has proved difficult in the past and prices make some targets unattractive.
Bloomberg News spoke to 10 banking leaders who shared their views privately on the deals that make strategic sense. Most say that Commerzbank AG should be taken over, and BNP Paribas SA is seen by many as a likely acquirer of the German lender.
BNP Paribas - Commerzbank
France’s biggest bank has bucked the trend among European lenders, emerging from the past decade without an annual loss. As rivals retreated in investment banking, burdened by stricter capital rules, rising compliance costs and competition from stronger U.S. firms, BNP has grown market share.
BNP Chief Executive Officer Jean-Laurent Bonnafe has pledged to grow profit by more than 6.5 percent annually through 2020 and expand revenue in the global-markets division by about 5 percent a year in the same period. Banking executives say Bonnafe may consider deals to expand more significantly.
BNP is said to have been in touch with the German government last year about buying its 15 percent stake in the rescued bank. Acquiring Commerzbank, Germany’s second-biggest lender, would give BNP access to its Mittelstand client base, the engine of Europe’s largest economy. Billionaire Stephen Feinberg’s Cerberus Capital Management in recent months has built a holding of 5 percent in Commerzbank, becoming one of the company’s top three shareholders along with the German government, a signal that a deal may be inevitable.
Commerzbank - Deutsche Bank
Cerberus, the private-equity firm known for investments in distressed debt, is also betting on Deutsche Bank, Germany’s biggest bank, with a stake of about 3 percent. Weighed down by legal bills for past misconduct that have topped all European lenders, Deutsche Bank has struggled to adapt to the widespread drop in trading revenue, which has coincided with requests for higher capital for risk-taking businesses. At home the fierce competition in consumer banking, even as rates remain at record lows, has squeezed margins.
Deutsche Bank CEO John Cryan has urged that there be more consolidation among European banks struggling to shore up profitability and held talks with Commerzbank in 2016, a person familiar with the matter said at the time. Merging the retail businesses in Germany would lower costs and the bank would emerge as an insurmountable competitor in financing small- and medium-sized businesses.
The main snag for a deal with Commerzbank? Though it still trades at two-thirds of book value, it’s seen to be as much as 40 percent overvalued.
Commerzbank - UniCredit
Under CEO Jean Pierre Mustier, UniCredit SpA has strengthened its balance sheet by selling bad debt and tapping investors for funds. Mustier has also streamlined the lender, cutting jobs, after expansion by previous management across central and eastern Europe added scale but also complexity.
Executives of the Italian bank last year held discussions with German officials about a potential combination with Commerzbank once the lenders’ restructurings are complete, a person with knowledge of the talks said at the time.
Commerzbank would give UniCredit greater access to SMEs, a business in which the Italian lender is already seeking to gain market share, while providing the opportunity to reduce some costs across the consumer businesses.
Mustier has said all options for growth are open after 2019 and may include acquisitions.
Lloyds Buys in Europe
Led by Portuguese CEO Antonio Horta-Osorio, Lloyds Banking Group Plc could look outside its home U.K. market for growth as Brexit threatens the local economy.
After spending six years restructuring and shrinking Lloyds to help repay the bailout during the financial crisis, Horta-Osorio is back on the offensive. He bought Bank of America’s $9.9 billion U.K. credit-card business MBNA last year and is preparing to unveil a new strategy for growth in February.
With opportunities limited in the ultra-competitive U.K. retail, mortgage and credit-card markets -- and British regulators keen to break down the dominance of the five largest lenders -- a continental expansion could be in the cards, bankers at Davos said.
The perennially-rumored target Commerzbank could be an option, or a smaller lender that would give Lloyds a foothold on the continent and room for growth outside its crowded domestic market.
Taking Over ABN Amro
Being mid-scale may not be an advantage in the longer term, according to banking executives. With the government still owning part of ABN Amro after a bailout, the best option may be for a sale to a competitor.
In 2016, the Dutch government held preliminary talks with the management of Nordea Bank AB, a deal that would have allowed the Nordic region’s biggest bank to move its headquarters from Stockholm to the Netherlands and lighten the regulatory burden. The discussions failed and Sweden’s Nordea is instead moving headquarters to Finland.
Bankers say a deal with ABN Amro still has logic, but they also see the bank becoming prey to BNP Paribas, Deutsche Bank or UniCredit.
UniCredit - Deutsche Bank or SocGen
One long-favored option would be having the Italian lender join forces with Deutsche Bank, a person said. The firms would be stronger on the home turf of Germany, and Deutsche Bank’s investment-bank footprint could be reinforced in Europe.
Combining with Societe Generale SA, France’s second-biggest bank, which retains a global trading business, could also be attractive for UniCredit. The deal would combine two large domestic players.