Fantasy bank M&A is a fun parlour game for market watchers.GlobalCapitalisn’t the most skilled player of it, but we’ve raised sceptical eyebrows at suggestions that JP Morgan would buy Standard Chartered, and/or the investment bank of UBS, musings that Barclays and Deutsche should combine, and a host of other more exotic suggestions.
There’s surely some kernel of truth behind the UniCredit-Commerzbank story — Reuters takes its reporting seriously — but it does stretch the imagination to think that post-crisis, big bank consolidation is back on the cards in Europe.
For much of Europe, at least, the
big banks are in repair mode. UniCredit
only unveiled its turnaround strategy in December, executed a €13bn capital
raise, and is still working through its non-performing loan problem. Commerzbank
has its own legacy issues still to deal with, and is rolling out its own
We’ve seen capital raises from Deutsche, Santander and Credit Suisse this year, while other firms like Barclays have cut dividend payments. None of that exactly signals “back on the acquisition warpath”.
Perhaps two ailing institutions could combine for mutual support — an all-share merger in debased, below-book-value currency — but few are on the front foot.
The US banks are in far better shape, but have limited appetite to splash out overseas. All the big US firms passed their Comprehensive Capital Analysis and Review tests from the Federal Reserve with flying colours this time around — and promptly announced big share buy-backs.
JP Morgan and Citi together are returning more money to investors this year than Deutsche Bank’s entire market cap. That’s a testament to the size of the warchest available, but a clear signal of priorities.
Then there’s regulation. Europe has a Banking Union, with a Single Supervisor across the eurozone. But in typical European style, it doesn’t exactly work seamlessly. National regulators still have wider discretion over the prudential behaviour of their charges, and ring-fence capital and liquidity resources even within individual eurozone countries.
Indeed, part of the logic for UniCredit’s supposed interest in Commerzbank was just that — UniCredit has trapped capital in its German HVB subsidiary, which it could do little else with. Otherwise, why would any bank redeploy capital into the low-returning German market?
Regulatory nationalism is unlikely to look kindly on cross-border roll-ups, while the commercial logic of any combination will be obscured by uncertainty. The European Central Bank might like to see proper cross-border consolidation, but local regulators do not.
There’s absolute size, as well. Europe’s big banks are mostly smaller than their US counterparts, even though their balance sheets are swollen with mortgages, but they’re still very large.
Commerzbank is no longer a “global systemically important bank”, but its two potential buyers were, with the extra capital requirement this entails. The banks at the top of the global size table, JP Morgan and Citi, are actively working to move down the list, and the banks at the bottom hope to drop off entirely. Buying another big bank would arrest the process, and cut capital headroom.
Valuation also matters. There are banks on high multiples and banks on miserable multiples but lots of firms are still facing huge uncertainty over costs and earnings outlooks. Fines in the multiples of billions make for wide bid-offer spreads, while regulatory caprice means capital requirements will move around too.
Europe is undoubtedly over-banked, and even the biggest firms are sub-scale, relative to the scale of the Europe Single Market. But for the foreseeable future, cuts to capacity will likely come within each country. The collapsed banks of Vicenza and Veneto were gobbled up by Intesa, while Santander scooped up Banco Popular for €1. These were emergency situations, but national champions could consolidate these markets still further
One day though, big bank M&A could return to the agenda. If Banking Union does ever become a reality, firms with deep footprints in many countries will be best placed to take advantage, and become the EU’s answer to the likes of JP Morgan. But the obstacles are formidable, and for now, it’s off the table. But the rumours are still fun.