Bank Mergers Are No Panacea

As domestic deals become a popular strategy for dealing with Europe’s low banking returns, the resignation of Unicredit’s CEO highlights the risks

By Rochelle Toplensky

Bankers love to think about mergers, but they aren’t a simple solution to the problems of Europe’s lenders, even within the same country.

UniCredit shares plunged Tuesday after Chief Executive Jean Pierre Mustier said he was stepping down over a disagreement about the strategic direction of Italy’s second-largest bank. A widely respected figure, Mr. Mustier had pushed back against board pressure to do deals, favoring capital returns to shareholders.

Last week, talks between Spanish lenders Banco Bilbao Vizcaya Argentaria and Banco de Sabadell collapsed due to disagreements over pricing, also highlighting the shaky case for deals.

Jean Pierre Mustier focused on making UniCredit leaner and more profitable./ PHOTO: HOLLIE ADAMS/BLOOMBERG NEWS

Bank mergers have long been seen as a way for European lenders to boost profitability in the face of persistent ultralow interest rates, sluggish growth and fierce competition from larger U.S. rivals.

A patchwork of European and national regulations all but block cross-border mergers, but domestic tie-ups have been possible. This summer, Intesa Sanpaolo bought UBI Banca to create Italy’s largest bank. Plus, CaixaBank agreed in September to merge with Bankia to create Spain’s largest domestic lender.

The logic even for domestic European banking mergers isn’t straightforward. Deals offer potential for cost-cutting and market-share gains, particularly in over-banked Germany, Italy and Spain. However, rationalizing branch networks can be very expensive and integrating a web of legacy systems is a challenge, particularly as customers increasingly expect to bank online.

Valuation is a barrier to getting deals over the line, particularly now. They are generally all-share exchanges, and the poor stock-market performance of banks this year has muddied the relative weight of different players. There is also a lot of uncertainty about what loan books will be worth in a post-pandemic world as the economy restarts, working patterns readjust and government support programs roll back.

There had been speculation that UniCredit, itself the product of three decades worth of banking mergers, might do a deal with Germany’s Commerzbank, France’s Société Générale or troubled domestic lender Banca Monte dei Paschi di Siena. However, during his 4½ years in charge, Mr. Mustier focused on making the bank leaner and more profitable. His performance earned him plaudits: He was a serious contender to run HSBC or Deutsche Bank, though both ended up picking other candidates.

Mergers clear a half-plausible path to profit growth in a sector with few alternatives. That is enough for some European banks, but the latest ructions at others serve as a warning that the strategy is fraught with difficulties. Success is far from guaranteed, even for those deals that go ahead.

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