The prospects for cross-border consolidation within the EU banking industry remain slim without further progress on the bloc’s banking and capital markets unions, according to analysts, in spite of the interest in such deals sparked by BBVA’s attempted takeover of fellow Spanish lender Banco Sabadell.
President Emmanuel Macron last month called for more dealmaking within the industry as part of the EU’s efforts to create a capital markets union, saying in an interview with Bloomberg that French lenders had been held back by their inability to buy foreign rivals.
Yet while large domestic deals are possible, cross-border deals continue to face significant obstacles, said analysts.
“Hurdles to deals include banking regulations and broader fragmentation of rules across Europe such as lack of tax and product harmonisation,” explained Nicolas Charnay, managing director, S&P Global Ratings, who noted that retail products such as mortgages had different features and were subject to different regulations.
“This makes it hard to generate economies of scale and therefore find economic sense in cross-border deals.”
Sabadell rejected BBVA’s initial bid, with the latter launching a hostile takeover attempt in response. BBVA chair Carlos Torres on June 10 urged shareholders to approve a new share issuance as part the bank’s €12bn takeover bid of its smaller rival.
Charney noted that the EU’s framework theoretically allows a bank to open one legal entity in one country, and then open branches elsewhere in the bloc without having to open multiple legal entities.
While American lenders have used this pathway to open operations in Frankfurt and Paris post-Brexit, European lenders have been reluctant to use the mechanism.
“It’s partly due to host authorities and politicians not really liking this idea that they would basically lose a bit of control,” Charnay added.
In the absence of a Europe-wide deposit guarantee scheme — the long-delayed missing pillar of the bloc’s mooted “banking union” — it would be up to the domestic safety nets to cover the costs of the failure of a local subsidiary of a foreign bank.
And while the upcoming EU legislative cycle could see the banking union project gather pace, its incompleteness “restricts the fungibility of capital and liquidity across borders”, said Scope Ratings in a recent note.
With such legislative planks still not in place, the EU’s largest banks continue to think of themselves as national rather than regional players, requiring a mindset shift from CEOs, added Filippo Alloatti, head of financials in the credit team at Federated Hermes.
“They should think more European than purely domestically, especially the larger ones,” he said.
Yet larger cross-border deals may ultimately prove inefficient. “A global systemically important bank could also incur a capital surcharge if it was to take over another large institution,” a London-based analyst told The Banker, asking not be named.
Based on their size, G-SIBs have been allocated to five different buckets corresponding to different capital buffers. Crédit Agricole, Société Générale, Santander, ING and Deutsche Bank are included in the G-SIB list, which is revised on an annual basis.
While the case for large cross-border mergers remains weak, there is potential for domestic activity in Italy, Spain, Germany and the UK, according to Scope Ratings.
Domestic deals have fewer integration risks than cross-border deals, thanks to a closer cultural alignment between merging entities, greater knowledge of the market and lower risk of political interference, said the rating agency.
