Euro banking union dream rekindles leaders’ animal spirits

Bloomberg

With European banking mergers at their lowest on record — and profits slumping — politicians are finally getting more serious about the need for
consolidation.
German finance minister Olaf Scholz is seeking to persuade European colleagues of the need for a banking union. He called publicly last month for a deposit insurance system that works across the region, a necessity for cross-border deals because it would make it easier for banks to take deposits from one market and lend in another. He’s now lobbying fellow ministers on its merits, and while his proposal has run into opposition, the bare facts are by now so bad policymakers find them hard to ignore.
The volume of European bank acquisitions has slumped even as top executives acknowledge the need for fewer players across the continent’s fragmented banking landscape and governments seek healthier lenders to boost growth. Profitability is a fraction of that at Wall Street rivals, and even with stock markets near records, shares of many large lenders are languishing. Add to that the fact that several European governments are still stuck with big holdings in their banks that they want to sell.
“The attempt by Scholz to break the deadlock and move the project forward is certainly a welcome development,” said Andreas Lindh, co-head of JPMorgan Chase & Co.’s financial institutions group for Europe, the Middle East and Africa. “There’s clearly a degree of frustration around the lack of progress on the banking union.”
While moving deposits across borders is only one of the outstanding hurdles to make deals more feasible, a move toward a common deposit insurance plan would be a clear first major step at stimulating deals. European countries have different rules for money laundering and financial products, and banks can’t consolidate capital or treasury functions at the holding level.
Unlike the US, Europe’s banking sector didn’t see large-scale consolidation after the 2008 financial meltdown. Post-crisis regulation was designed to prevent lenders from becoming too big, so European lenders cut back their investment-banking operations and exited businesses that consumed too much capital.
Fast forward ten years, and European bank CEOs still find themselves under pressure — now not because of capital, but due to profitability. Ultra-low interest rates, regulatory costs, ongoing restructurings and the need to replace aging technology systems are all weighing on earnings. Deutsche Bank AG is cutting 18,000 jobs and has said achieving some of its targets will be challenging. Italian rival UniCredit SpA plans to cut about 8,000 positions.
“Given negative interest rates and subdued growth, it will be difficult for banks to remain profitable through traditional banking activities,” said Giorgio Cocini, Bank of America Corp’s co-head of financial institutions advisory in EMEA.