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Slow growth may prompt more Europe bank M&A, but Deutsche-Commerz a special case


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Slow growth may prompt more Europe bank M&A, but Deutsche-Commerz a special case

European banks may resort to more consolidation as they tackle ongoing profitability issues amid an economic slowdown in 2019, but a potential merger of Deutsche Bank AG and Commerzbank AG is something of a special case, panelists at an S&P Global Market Intelligence event said March 21.

With a sharper slowdown projected across Europe in 2019, the ECB has taken a step back in normalizing monetary policy, with no rate hikes planned for this year, panelists said during a discussion at the Daily Dose LIVE event held under the Chatham House rule.

This will add further pressure on European bank profits, which have been persistently low in recent years, they added. Greater capital market volatility is also weighing on many banks' bottom lines and has driven valuations down considerably. Based on price-to-tangible book ratios, European banks are now trading closer to Japanese than to U.S. peers, the panelists noted.


Europe as a whole is following in the footsteps of Japan from 20 years ago, as it goes through its own balance-sheet recession at the end of a 60- to 70-year debt cycle, Berenberg equity analysts said in a March 19 note.

The continent's current macroeconomic trends, demographics, banking sector performance, and policy moves are very similar to those in Japan from the late 1990s, the analysts said, saying we are witnessing a "Japanification of Europe."

This month's ECB meeting painted a "grim outlook" for European growth and inflation, they said. The high debt burden in Europe and other developed economies will negatively affect both, which depresses the natural rate of interest.

The analysts said European interest rates would remain at or near the zero bound "for the forseeable future," against which background the outlook for bank profitability remains poor.

SNL Image

The headquarters of Deutsche Bank, left, and Commerzbank are seen in Frankfurt, Germany, on March 18, 2019.

Source: Associated Press

The very low profitability makes European banking a very difficult sector to invest in, and as banks look to boost performance, there will probably be more consolidation this year, the panelists at the Daily Dose LIVE event said.

Deutsche-Commerz special case

However, bank mergers will likely remain on a domestic level as cross-border deals still pose big challenges, the panelists noted.

Bank M&A has been hotly debated in Europe over the past two years, with European Union regulators calling for more consolidation, especially across borders, from early 2017.

Since then, several large European institutions including Deutsche Bank and Commerzbank have made headlines amid speculation about potential tie-ups.

Frankfurt-based Commerzbank was at the center of much speculation, as its relatively healthy balance sheet and depleted market valuation made it an attractive takeover target for foreign groups like BNP Paribas SA, UBS Group AG, and UniCredit SpA.

It was also repeatedly named as a good merger candidate for Deutsche, as Germany's top lender has struggled with its strategic turnaround over the past few years, and the pair have begun exploratory talks.

But this is a special situation that is not likely to move the needle on Europe-wide consolidation, the panelists said.

What would make a real difference would be a cross-border merger, for example between two banks from Italy and France, but the barriers for such deals remain very high.

On the one hand, the market needs to see clear synergies to support a merger and on the other, the banks themselves would need to be convinced. A cross-border deal would also probably push the merged entity into a higher regulatory capital bracket, the panelists said.

'Too big to fail' worries

There are also questions around gaining regulatory approval for an institution that could threaten the whole financial system if it fails. This has been noted in Deutsche and Commerzbank's case.

Both the EU Single Supervisory Mechanism and the Single Resolution Board, which is in charge of winding down banks, have sounded alarms over this. The SSM's new chair, Andrea Enria, said in a recent interview that such banks would need to hold more capital in case they run into trouble.

"While many bank combinations can be imagined, supervisory authorities have become wary of large banks that are 'too big to fail'," Brussels-based think tank Bruegel said in an analysis of European bank mergers in June 2018. This implies that deals creating "mega-banks" with more than €2.5 trillion to €3 trillion in assets may not get approval, Bruegel said.

The last successful cross-border bank mergers in Europe were almost 15 years ago, according to Bruegel's analysis.

In 2004, Netherlands-based ING completed the takeover of Germany's Direktbank to form ING-DiBa AG, and Spain's Banco Santander SA took over U.K.-based Abbey National the same year.

EU regulators, politicians and a number of top European bank bosses have promoted the idea of more consolidation as a way to strengthen the sector and make domestic lenders more competitive on a global level.

But in spite of the noise, none of the European groups have acted on cross-border deals. Domestic consolidation has continued but predominantly among smaller institutions that have used mergers as a survival tactic amid the low interest rate environment.