Commerzbank fight is stress test for EU bank union
The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to add note to third graphic to specify that ‘banks’ are as classified by the Global Industry Classification Standard.
By Peter Thal Larsen
LONDON, Sept 27 (Reuters Breakingviews) -Commerzbank CBKG.DE has long been an also-ran in European banking. Its balance sheet is roughly one-fifth as large as French rival BNP Paribas BNPP.PA; its stock market value is barely a quarter of Spain’s Banco Santander SAN.MC. Yet Germany’s second-largest private lender is at the centre of a battle that could determine the outcome of a decade-long effort to level the playing field for financial institutions in the euro zone. If politicians led by Chancellor Olaf Scholz thwart a possible takeover bid by rival UniCredit CRDI.MI, the dream of more cross-border banking will be dead.
The 60-billion-euro Italian lender’s ambitions to expand in Europe’s largest economy stretch back to 2005, when it completed a successful offer for Munich-based HypoVereinsbank (HVB). It was part of an ambitious plan to transform UniCredit into a pan-European lender, powered by the continent’s newly minted single currency.
The group’s adviser at the time was a Merrill Lynch investment banker called Andrea Orcel. Two decades on, the Italian dealmaker occupies the corner office at the Milan-based lender. This month he laid siege to Commerzbank, buying a 4.5% stake from the German government and building a 21% economic shareholding. UniCredit’s preference is for a full takeover offer, a person familiar with the matter told Breakingviews. It is due to hold a first round of talks with Commerzbank on Friday.
Orcel’s brash move is a relatively rare recent case of a European bank CEO hoping to buy a large lender in another country. Enthusiasm for such dealmaking cooled after the 2008 financial crisis and subsequent euro zone meltdown, when regulators and executives learned the hard way that when banks get into trouble, domestic taxpayers pick up the bill.
The 2007 breakup bid for Dutch lender ABN Amro ABNd.AS by three European rivals - Royal Bank of Scotland, Fortis of Belgium and Santander - offered a vivid illustration of the risks that arise when banks venture across national boundaries. The consortium, whose key advisers included Orcel, fell apart in the chaos of 2008. RBS, Fortis and ABN Amro were nationalised by their respective governments. Only Santander escaped relatively unscathed.
Since then, though, euro zone watchdogs have overhauled the rules. Governments created a single supervisory body under the European Central Bank in Frankfurt, and a unified entity with responsibility for handling bank failures. The idea was that big European lenders should receive consistent treatment, regardless of the location of their head office.
Yet obstacles to consolidation remain. Politicians have failed to agree on a common system for insuring bank deposits in the single currency area, while the so-called Single Resolution Mechanism lacks a financial backstop that could help it absorb the losses incurred by a large bank failure. Local financial watchdogs also continue to flex their muscles, as UniCredit has learned to its cost. The Italian bank’s German unit has a common equity Tier 1 capital ratio of 23%, far in excess of the level regulators require of other lenders.
Bank bosses have other reasons to be cautious. Most chief executives spent years cleaning up balance sheets and cutting costs to adapt to the era of low interest rates. Stock market valuations were depressed. And aside from the political sensitivities, cross-border deals generally produce fewer cost savings, making them harder to justify to wary shareholders.
As a result, M&A activity has collapsed. Since 2009, European banks have completed domestic mergers worth $198 billion euros, according to Dealogic data. That’s less than in just five years leading up to the financial crisis. The value of cross-border mergers since 2009 is less than half the total between 2004 and 2008. Banks have mostly focused on scooping up smaller domestic rivals, or buying each other’s minor subsidiaries - such as BNP’s recent acquisition of HSBC’s HSBA.L, 0005.HK German private banking unit.
Against this subdued backdrop, UniCredit’s interest in Commerzbank looks bold. However, it’s hardly radical. For one, it would effectively be a domestic merger. Splicing together the second- and third-largest private banks in Germany would displease labour unions by triggering job losses, but generate cost savings which would help sell the deal to shareholders. Besides, the Italian bank has proposed a similar combination several times, most recently in 2019.
Orcel’s assertive tactics have gone down badly with German politicians, who were taken aback by a rival bank buying shares the state had announced it wanted to sell. “Unfriendly attacks, hostile takeovers are not a good thing for banks,” Scholz said earlier this week. Friedrich Merz, the Christian Democrat opposition leader, declared a takeover “a disaster for Germany’s banking market.”
Yet for all the bluster, German authorities have few effective ways to thwart a deal beyond refusing to sell their remaining 12% stake in Commerzbank. Regulators at the ECB, which has long advocated bank mergers, are unlikely to stand in the way. Indeed, six ECB policymakers are in favour of the combination, Reuters reported on Wednesday.
This does not guarantee a deal will go ahead. Commerzbank shareholders may decide that an offer is too stingy. Alternatively, they may choose to sell to a different bidder. Investors in UniCredit could veto a combination, while regulators can withhold approval if they deem it too risky. None of these outcomes would undermine Europe’s single financial market.
By contrast, if German political leaders succeed in discouraging a takeover of Commerzbank by a rival based in a different country, Europe’s banking industry will once again fragment. Politicians and national regulators would need little encouragement to reassert their authority over local banks, while devising new ways to repel foreign rivals.
Earlier this month, former ECB President Mario Draghi released his long-awaited report on boosting the EU’s competitiveness. His study bemoaned European banks’ lack of scale and low profitability when compared with U.S. rivals: JPMorgan’s JPM.N $600 billion market value is roughly the same as the 10 largest euro zone lenders combined.
Draghi’s proposed solution is to create a new pan-European jurisdiction for the largest international banking groups. Whatever the merits of the idea, it’s indicative of the need for Europe to overhaul its financial architecture. An institution like Commerzbank is a small player in such schemes. But if German politicians succeed in preventing a takeover of the group, Europe’s small steps towards a banking union could quickly go into reverse.
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CONTEXT NEWS
Commerzbank will hold a first round of talks with UniCredit on Sept. 27, as the Italian lender presses for a possible tie-up, the German bank’s designated CEO, Bettina Orlopp, said on Sept. 26.
Just minutes earlier Commerzbank said its supervisory and management boards unanimously agreed to support the bank’s current strategy of independence, and increased profit and payout targets to bolster support among investors.
UniCredit earlier in September revealed it had bought a 9% stake in Commerzbank, later adding that it had acquired a 21% economic interest in the bank using derivatives.
The bank’s move has sparked opposition from German politicians and labour unions. However, former Italian Prime Minister Enrico Letta on Sept. 25 said national governments should refrain from intervening in the deal if Europe is to move towards closer integration. “Politics must let the market determine the choices in this case. The market is European, not national,” he said.
Excess capital trapped in UniCredit’s local German unit https://reut.rs/4dlQwrt
European bank M&A activity has collapsed https://reut.rs/3ZKftKh
Ten biggest North American and European banks https://reut.rs/4dmJaUL
Editing by Liam Proud and Streisand Neto
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