Davos elite eyes M&A across Europe’s banking industry

Bloomberg

The rationale for merging some of Europe’s biggest lenders is compelling. That’s the view of many financial executives who met at the World Economic Forum in Davos, Switzerland, last week. A decade after the financial crisis, some of the region’s biggest lenders are facing declining revenue as interest rates linger near record lows, while legal bills and capital demands have eroded profit.
Combinations of consumer-banking operations could help pare costs and fend off competition from fintech startups. And firms that are too exposed to volatile businesses, such as trading that consumes more capital, could bolster returns by diversifying and adding steadier and higher-margin activities.
Some banking leaders say that European regulators are warming to the idea of mergers, fuelling speculation that deals are drawing closer, even if they are not a sure bet for 2018. Others say regulators’ greater capital demands of larger firms still make banking mergers improbable.

BNP PARIBAS – COMMERZBANK
France’s biggest bank has bucked the trend among European lenders, emerging from the past decade without an annual loss. As rivals retreated in investment banking, burdened by stricter capital rules, rising compliance costs and competition from stronger US firms, BNP has grown market share.
BNP CEO Jean-Laurent Bonnafe has pledged to grow profit by more than 6.5% annually through 2020 and expand revenue in the global-markets division by about 5% a year in the same period. Banking executives say Bonnafe may consider deals to expand more significantly.

COMMERZBANK – DEUTSCHE BANK
Cerberus, the private-equity firm known for investments in distressed debt, is also betting on Deutsche Bank, with a stake of about 3%. Weighed down by legal bills for past misconduct that have topped all European lenders, the bank has struggled to adapt to the widespread drop in trading revenue, which has coincided with requests for higher capital for risk-taking businesses. At home the fierce competition in consumer banking, even as rates remain at record lows, has squeezed margins.

COMMERZBANK – UNICREDIT
Under CEO Jean Pierre Mustier, UniCredit SpA has strengthened its balance sheet by selling bad debt and tapping investors for funds. Mustier has also streamlined the lender, cutting jobs, after expansion by previous management across central and eastern Europe added scale but also complexity.
Executives of the Italian bank last year held discussions with German officials about a potential combination with Commerzbank once the lenders’ restructurings are complete, a person with knowledge of the talks said at the time.

LLOYDS BUYS IN EUROPE
Led by Portuguese CEO Antonio Horta-Osorio, Lloyds Banking Group Plc could look outside its home UK market for growth as Brexit threatens the local economy.
After spending six years restructuring and shrinking Lloyds to help repay the bailout during the financial crisis, Horta-Osorio is back on the offensive.
TAKING OVER ABN AMRO
Being mid-scale may not be an advantage in the longer term, according to banking executives. With the government still owning part of ABN Amro after a bailout, the best option may be for a sale to a competitor. In 2016, the government held talks with the management of Nordea Bank AB, a deal that would have allowed the Nordic region’s biggest bank to move its headquarters from Stockholm to the Netherlands and lighten the regulatory burden.

UNICREDIT – DEUTSCHE BANK OR SOCGEN
One long-favoured option would be having the Italian lender join forces with Deutsche Bank, a person said. The firms would be stronger on the home turf of Germany.
Combining with Societe Generale SA, France’s second-biggest bank, which retains a global trading business, could also be attractive for UniCredit.