UniCredit acquiring Commerzbank would carry profit, execution risks

UniCredit SpA's pursuit of German peer Commerzbank AG would leave it with greater exposure to a less profitable banking market and carries major integration risks.

The Italian bank has amassed a 21% position in German peer Commerzbank and stated that it is open to all options for its stake, including a full takeover offer. Commerzbank's shares have soared since the move was disclosed, indicating investor appetite for long-awaited cross-border M&A that would improve scale and competitiveness in the European banking sector.

Yet a deal would carry with it several risks for UniCredit. The combination would give a heavier weighting within the group to Germany, a much less profitable banking market than Italy. It also carries significant integration challenges, which could weigh on the lender's valuation and ability to expand in other areas.

"While UniCredit can draw on past experience, the execution of cross-border mergers is always notoriously challenging, and integration costs can significantly erode the anticipated strategic synergies," said Sonia Falconieri, professor of finance at Bayes Business School.

Germany-heavy

Acquiring Commerzbank would increase the share of UniCredit group revenues generated from Germany to about 40%, while Italy's portion would fall to about 33% from 47%, according to Johann Scholtz, senior equity analyst at Morningstar.

The performance of Germany's banking industry lags that of Italy's across several key metrics. Over the past five years, German banks have consistently been less profitable, less efficient and generated weaker lending margins than their Italian peers, S&P Global Market Intelligence data shows.

Germany's banking market is highly fragmented and characterized by a prevalence of state-owned lenders, known as landesbanken, that have a mandate to support the regional economies in which they operate. This fiercely competitive landscape makes it "really hard for commercial banks to generate profit," said Scholtz.

Indeed, Commerzbank's return on actual equity (ROAE) was roughly half that of UniCredit in 2023, and analysts expect that gap to remain similar through 2025, Market Intelligence mean consensus estimates show. It is also forecast to report much weaker efficiency and fee income growth than UniCredit over the same period.

The greater weighting of Germany within the group could drag on the price-to-book value of UniCredit, said Scholtz. On the day UniCredit's initial investment was announced, its price to tangible book value was 105.54, compared to just 63.33 for Commerzbank.

"We would probably have preferred them expanding their presence in Italy rather than Germany," said Scholtz.

Uneasy alliance

Bringing together two major European banks is fraught with hazards.

Political resistance to a deal has already been established among labor unions and politicians, including German Chancellor Olaf Scholz. The discreet nature in which UniCredit has amassed its position in Commerzbank could also make a merger more challenging, according to Falconieri.

"When you get into a negotiation that is considered hostile, the target puts up so many expenses and so many obstacles that it makes it extremely difficult, not only from a price point of view, but also afterwards for the integration," she said.

Combining IT systems is a challenge that can erode much of the synergies mergers purport to extract, with notable examples including Banco de Sabadell's takeover of TSB and Deutsche Bank's botched IT migration at Postbank.

Cultural risk is another factor in cross-border deals, according to Guoxiang Song, senior lecturer in finance and banking at the University of Greenwich. However, UniCredit's existing presence in Germany and pan-European experience could mitigate that.

Pursuing a transaction of this nature also presents opportunity costs, said Falconieri. Depending on the price a deal is struck at, UniCredit's bullish shareholder returns may come under pressure, and the bank could have less firepower and management bandwidth to pursue deals in its home market and elsewhere.

"You might engage in long conversations and negotiations and end up with nothing if, for instance, another offer materializes or it becomes too contentious and you walk away," said Falconieri.

Bold ambitions

To be sure, UniCredit has much to gain from a successful tie-up with Commerzbank, which would further expand its continental footprint and enable it to "finally be perceived by the market as one of the blue-chip banks of Europe," analysts at KBW wrote in a Sept. 11 note.

Merging Commerzbank with its own German unit UniCredit Bank GmbH, also known as Hypovereinsbank (HvB), would present cost savings and revenue-boosting opportunities. Commerzbank has 431 branches across Germany while HvB has 292, according to Market Intelligence data. About 40% of HvB branches are within 500 meters of a Commerzbank site, the data shows.

"UniCredit can use its strength to achieve synergies, economy of scale and cost reductions through an acquisition because there is a geographical overlap of the two banks," said Song.

It could also enable UniCredit to gain access to a cheaper and wider source of funding, given the lower borrowing costs in Germany compared to Italy. Furthermore, it is likely to garner support from Europe's banking regulator, the ECB, which "has long been advocating for more cross-border banking consolidation to make the sector more resilient, stronger, and more competitive vis-a-vis the US," said Falconieri.

Next steps

UniCredit CEO Andrea Orcel has said the bank will walk away if a deal does not meet its financial criteria. Meanwhile, Commerzbank has appointed a new CEO, Bettina Orlopp, to steer the bank through this uncertain period. Orlopp has raised the bank's growth targets; some analysts see this as a possible takeover defense.

Both Falconieri and Scholtz expect any takeover approach to happen within two years. "[The minority stake] will become too much of a distraction," said Scholtz. "The analysts will keep on asking you the whole time whether you're going to do the deal."

Still, the hurdles to a deal are high, and there are no guarantees that a more efficient, profitable European champion would emerge from a combination.

"The track record of European banks hasn't been great in terms of delivering on these large cross-border mergers," said Scholtz.