Consolidation in the fragmented European banking sector is likely to continue given the pressure on companies from negative interest rates, the impact of the COVID-19 pandemic and the regulatory push for M&A, executives from UBS Group AG, Credit Suisse Group AG, Deutsche Bank AG and Commerzbank AG told a conference Sept. 22.
They see domestic mergers as easier to complete and more likely to generate synergies than cross-border deals, but they are not expecting big M&A moves in their home markets of Germany and Switzerland, at least in the near term.
'Industrial logic' but not in Germany
Consolidation has been a hot topic for several years now, with negative interest rates weighing on the net interest margins of all European banks, and many countries being overbanked, Credit Suisse CEO Thomas Gottstein said at the Bank of America Merrill Lynch Annual Financials CEO Conference.
Deutsche Bank CFO James von Moltke said there is "industrial logic, at least among the larger banks" to achieve greater scale through mergers. Speaking at the conference, he also said domestic M&A in Germany — especially between large banks — presents more challenges because of the specific structure of the market.
He gave as an example Deutsche Bank's own decision to drop merger talks with the country's second-largest listed lender by assets, Commerzbank, in early 2019. Deutsche is focusing on its ongoing strategic restructuring which will help it prepare for the upcoming M&A wave and will enable it to potentially join that wave later on, Von Moltke said.
"There may be more opportunistic ways to grow," he said. "And from time to time we will likely have a look at smaller opportunities."
Commerzbank CFO Bettina Orlopp also pointed to the three-pillar model of the German banking system — split into public sector, cooperative and privately-held commercial banks — as a barrier to speedy domestic consolidation.
"Consolidation across the pillars, I think, is still something [for] the long-term," she said, adding that Commerzbank is also very focused on executing its restructuring program and pursuing a "stand-alone strategy."
Commerzbank is in the process of looking for a new CEO to replace outgoing chief Martin Zielke, who is leaving amid regulatory and investor pressure on Commerzbank to accelerate cost cuts and boost profits. The bank also changed its supervisory board chairman in August.
While an M&A wave in Germany would be a challenge, recent cases in Spain and Italy demonstrate that domestic consolidation has value and "makes a lot of sense," Orlopp said.
Spain, Italy ready for M&A wave
Earlier this year, Italy's second-largest bank by assets, Intesa Sanpaolo SpA agreed to take over smaller domestic rival Unione di Banche Italiane SpA, and Spain's third-largest lender CaixaBank SA struck an all-share-merger deal with Bankia SA. This latter merger is expected to trigger a new consolidation wave in the fragmented Spanish banking market, analysts told S&P Global Market Intelligence earlier in September.
Aside from Spain, Italy is the most likely candidate for further bank consolidation in the near future, Berenberg equity analysts said in a Sept. 23 research note. They said they remain skeptical about cross-border consolidation as the lack of a banking union in Europe reduces the scope for cost synergies, limiting the financial rationale of such deals.
The banking union project is aimed at creating a common banking resolution and supervision system in the eurozone and shifting responsibility from a national to EU level. The project is seen as a necessary prerequisite to cross-border bank mergers because it will lower the existing legal and regulatory barriers to such deals.
Commerzbank's Orlopp also said meaningful cross-border M&A would depend on more progress being made in the EU banking union project.
Consolidation is "inevitable" in the future, and especially since COVID-19 hit, UBS CEO Sergio Ermotti told the conference. A driver is the fact that regulators are now more willing to consider ways to ease bank mergers and accept the trade-off between too-big-to-fail concerns and steps necessary to create a sustainable banking sector, he said. Previously, "the debate in Europe was too focused on too big to fail and rather, it should have been too small to survive", he said.
In a recent step to drive bank M&A, the ECB launched a new guide to supervising sector consolidation, including permission to count badwill as part of capital requirements in M&A instead of automatically raising requirements for the merged entities. Badwill, or negative goodwill, is generated when a bank takes over another at a discount to its book value. Recent bank mergers have generated large amounts of badwill because European bank stocks have been trading at record lows.
Gottstein also said regulatory approvals for big bank mergers and the too-big-to-fail considerations have been a barrier to deals. While Swiss bank consolidation has continued over the past two decades, reducing the number of domestic lenders to some 250 in 2020 from some 360 in 2000, domestic mergers are still complicated as well as cross-border deals.
Credit Suisse and UBS recently made headlines after Swiss blog Inside Paradeplatz reported UBS' chairman Axel Weber had commissioned a feasibility study on a potential merger with Credit Suisse.
Ermotti did not comment on UBS' own M&A plans but said scale "means nothing" without the businesses being complementary. This is essential to create sustainable returns for shareholders, the UBS CEO said.