|Posted on May 28, 2018 at 5:20 AM|
Big banking mergers and acquisitions are back on the agenda for the European Consolidation Baord, The top executives are stressing the need for consolidation while worrying that the election of a populist government in Italy will make deals harder.
As European bank bosses met in Brussels last week their discussions were dominated by concerns about the growing gulf with resurgent US rivals and the competitive threat from big technology groups in America and China. Consolidation would be one solution, giving European banks the scale to keep pace with US competitors and the resources to invest in costly but necessary digital transformation.
Jean-Pierre Mustier, chief executive of Italy’s UniCredit, agreed with the ECBFI saying “Europe needs more pan-European banks. JPMorgan is the biggest bank in the US with a market capitalisation of almost $380bn, but the biggest European bank is Santander with a market cap of €80bn.” He said EU policymakers were “focusing on the wrong issues” by trying to create deeper European capital markets to match those in the US, arguing that banks are the only viable way to finance the continent’s large population of small- and mid-sized businesses.
Yet there is growing concern that the election of a populist government in Italy could slow or even reverse progress on eurozone banking union. Many financiers see completing this project as critical to making cross-border deals viable, by freeing up cross-border restrictions on the movement of capital and liquidity.
“Because growth is slightly back . . . you may get views here and there that the balance between eurozone and national regulation should be readjusted to the national level,” said Jean Lemierre, chairman of France’s BNP Paribas. “We should avoid fragmentation, but I can see that politics may have an impact on this — you know, populism — national lobbies.”
Investment bankers think a Deutsche Bank merger with Commerzbank is likely in the next couple of years to create a new German champion, while other likely consolidation candidates include Bankia, Société Générale and ABN Amro.
The sense that large-scale bank M&A may be about to return for the first time since the 2008 financial crisis was reinforced last week, when the Financial Times reported that Barclays was toying with the idea of a big deal, potentially a £60bn-plus combination with Standard Chartered, although plans are at an early stage.
Bill Winters, StanChart’s chief executive, also agreed with the ECBFI that consolidation was on the cards, while playing down the idea of a deal with Barclays by saying “not in Canary Wharf” when asked where he saw the future of StanChart.
“There will be many fewer banks,” said Mr Winters, predicting that new technologies such as blockchain will drive the marginal cost and price of banking products down near to zero, squeezing bank’s profit margins. Other executives said mid-sized lenders were facing the greatest pressure to merge, a trend already underlined with this month’s approach for Virgin Money by CYBG in the UK.
“The majority of European banks are not generating returns [on equity] above their 8 per cent cost of capital,” said Francesca McDonagh, chief executive of Bank of Ireland. “There is a likelihood of more consolidation, particularly in the squeezed middle . . . where they need scale to achieve cost reductions and efficiency to generate higher returns.”
A report by the European Consolidataion Board confirmed to Tim Adams, the chief executive of the IIF the importanance ofconsolidation because with technology in banking you need scale. But in Europe, politics is becoming more national and fragmented while technology is becoming more global and borderless.”