Why a surprise €4.9 billion Italian bank merger won’t spark an M&A spree for Europe’s banks

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Intesa Sanpaolo’s surprise €4.86 billion ($5.3 billion) takeover bid for smaller rival UBI Banca, limited to the Italian market, is unlikely to trigger the wave of dealmaking among European banks that policy makers have been waiting for.

If successful, the move by Intesa ISP, +2.36%, Italy’s second-largest bank by assets, would create the eurozone’s seventh-largest bank by assets, with combined revenues of €21 billion and €1.1 trillion of in customer financial assets and. It would be one of the biggest banking deals in Europe since the end of the financial crisis.

Shares in UBI UBI, +23.55%, Italy’s fourth biggest lender, spiked almost 23% on Tuesday. Intesa’s stock was up 1.83%, valuing the bank at more than €45 billion.

The all-share bid is unsolicited which, according to Intesa CEO Carlo Messina, “doesn’t mean it is hostile.” UBI, which earlier on Tuesday had announced a new business plan to cut 2,000 jobs and operating costs by 6%, has so far refused to comment.

Intesa’s move comes as banks across Europe continue to be weighed down by negative interest rates, which have hit margins on loans, as well as higher regulatory burdens. They are also facing increasingly tough competition from savvy upstarts forcing traditional lenders to invest ever larger sums into customer facing technology.

The number of mergers and acquisitions involving European banks fell to its lowest level since the global financial crisis, according to recent research from S&P Global Market Intelligence. There were only 40 majority stake acquisitions in 2019 where the buyer or target was based in the European Economic Area or Switzerland, compared with 62 in 2018.

Germany, Spain and Italy are considered by analysts to be the three main countries ripe for consolidation.

Bank executives and policy makers have for years been pressing the need for European bank mergers to compete with their larger U.S. rivals.

But even though the European Central Bank, as the area’s single bank supervisor, has pushed in principle for a trans-border consolidation of the sector, it has also insisted that banks clean their balance sheets of the bad loans inherited from the euro crisis. Meanwhile, the ECB has indicated that it would be flexible in its supervisory approach to bank mergers.

German credit-ratings firm Scope Ratings said in a recent research note that market actors are “rooting for more cross-border consolidation,” but cautioned that credit investors should take a “very guarded view of any deal and its likely consequences.”

Scope analyst Sam Theodore, wrote: “Creating larger groups isn’t the elixir for cutting excess capacity, especially across borders. If, say, an Italian bank bought a German bank today and then tomorrow started to slice down its branch network and back office there would probably be an unsavoury political price to pay.”

Merger talks between Deutsche Bank DBK, -2.49% and Commerzbank CBK, -0.86% were abandoned just six weeks after they started last year after the two German lenders were unable to overcome the complex challenges of integrating the banks’ technology, back-offices and other operations.

Theodore said that financial metrics are relatively transparent and can be assessed with some confidence by banks considering a merger. But he added that new and growing areas of risk, such as misconduct/money laundering, cyber risk, and increasingly climate-change risks, are opaque and more difficult to gauge.

“A cautious bank should hesitate before walking into a mega-transaction without reasonable comfort about these risks vis-à-vis the merger party. This should be a growing reason to derail future combinations, especially cross-border,” he said.

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