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SocGen-UniCredit deal could be first step in banking union, but savings limited

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SocGen-UniCredit deal could be first step in banking union, but savings limited

A tie-up between Société Générale SA and UniCredit SpA could be the first step toward a wave of European cross-border consolidation, but the cost savings and benefits from a merger of two of the region's largest banks would be limited, according to analysts.

The Financial Times reported on June 3 that Italy's UniCredit had been looking at the idea over the last few months, while France's SocGen had also been studying a tie-up.

The combined bank would have a market capitalization of more than €60 billion, making it the fifth largest European bank in terms of market capitalization after SocGen's French rival, BNP Paribas SA, up from 11th place for UniCredit currently and 14th place for SocGen.

European regulators have been making increasing noises in favor of cross-border mergers, and banking executives are also making a push for them -- including SocGen's CEO Frédéric Oudéa who has predicted that in 10 year's time the fragmented European banking market would more resemble that of the U.S. Talk of deals has been swirling round the markets for some time, including potential tie-ups between BNP Paribas and Germany's Commerzbank AG. UniCredit's CEO Jean-Pierre Mustier, a former SocGen executive, has also talked up European banking consolidation.

Synergies

Tom Kinmonth, a fixed-income strategist at ABN AMRO, said that the likelihood of mergers between European banks was increasing given that lenders had gained comfortable capital levels following the financial crisis and the long-awaited Basel III post-crisis banking standards had been completed, but that finding the right fit was crucial.

"The market is getting ready now for mergers, but this one doesn't immediately jump out as one that could create synergies," he said.

While the combined bank would have a large geographical reach, spanning France, Italy and Germany, where UniCredit derives almost a quarter of its revenues, it would be challenging to merge operations between such large European countries with different cultures, he said.

Both banks are also successfully making the transition to digital banking, so would not bring benefits to each other in that respect, Kinmonth said.

Elisabeth Rudman, a managing director who heads EU financials at ratings agency DBRS, concurred that cross-border acquisitions are not an easy task.

"Our view is that cross-border M&A can present an opportunity for stronger banks that are skilled in integrating acquisitions, and both UniCredit and SocGen already have experience in cross-border M&A," she said in an email. "However, many banks have also found it very challenging to realize synergies from such cross-border operations."

Banking union

The European Union has been working on ways of creating a more integrated European banking market, but the creation of a banking union is still a long way off.

Johann Scholtz, an analyst at Morningstar, said that he saw few benefits from such a deal in the absence of banking union because each entity would be subject to national rules.

"It's almost like putting the cart in the front of the horse. You would want to see European banking union in place before you start putting these kinds of deals together," he said. However, he did note that the two banks might be putting measures in place enabling them to act quickly once banking union is implemented.

Another downside of a potential merger would be that the merged entity would not be a "firm national champion" in any market apart from Italy, he said.

Investment banking

SocGen's largest business line is investment banking, from which it derives 35% of revenues, while UniCredit's corporate and investment banking division accounts for 21% of revenues, and investment banking has been one of its main growth drivers.

While SocGen could bolster UniCredit's presence in investment banking, a tie-up would not make the new entity an investment banking powerhouse, Scholtz said.

In investment banking, lenders "need a proper global presence to really get the network benefits that filter through from having operations across the globe but this is not going to establish anything of the sort," he said.

SocGen's shares were up 1.1% at 4:44 p.m. in Paris, while UniCredit's were down 1.3%. SocGen announced on Monday it had reached an agreement with the U.S. and French authorities over two long-running legal cases, which had been weighing on its share price.