CORONAVIRUS CRISIS HAS MADE EVEN GLOBAL BANKS LOCAL / THE WALL STREET JOURNAL

Coronavirus Crisis Has Made Even Global Banks Local

Lenders are flying their national colors during the Covid-19 shutdowns, making cross-border deals in Europe less likely than ever

By Rochelle Toplensky

European banking has become decidedly more local during the Covid-19 crisis. One consequence is that the dream of cross-border mergers seems more far-fetched than ever.

Locally-run banks have proved very useful to leaders in Paris, Berlin and other European capitals during the economic shutdowns aimed at arresting the spread of the new coronavirus. Recent first-quarter results showcased the role national lenders are playing in supporting their home economies.

In times of trouble, banks tend to focus on top clients—usually big multinational businesses with which they share national roots. That has happened in this downturn too. Many global companies drew on pre-existing credit lines as debt markets seized up early in the crisis, often only to deposit the cash back with the same local lender as a rainy-day fund.

As the Covid-19 lockdowns hit, politicians also worked closely with their country’s biggest banks to extend easy credit to citizens and small and medium-size businesses. Loan balances grew in the first quarter. Although a lot of the new lending was to big clients, state programs also encouraged banks to lend more widely despite the greater macroeconomic uncertainty and risk. Expected credit losses are also up, partly offset by government loan guarantees.

Europe’s banking sector is more fragmented and less profitable than its U.S. counterpart. Some policy makers, investors and bank executives have long called for cross-border deals to help revive profits and build the scale necessary to take on Wall Street rivals. The last big flurry of rumors in mid-2018 centered on Italian group UniCreditand France’s Société Générale.

The current turmoil could create opportunities for big banks to buy up struggling domestic rivals, as happened in 2008. But the pandemic response has also underlined the entrenched localism of European politics, making cross-border deals less likely than ever.

To make them work, politicians would need to overhaul European banking rules. Negotiations have been stalled for years. Breakthroughs were achieved in the heat of the eurozone crisis, when national leaders overcame their entrenched positions to agree to new rules on stability funding. The current crisis might just usher in a new compact, but early signs aren’t promising.

Home bias was also evident in investment banking when European debt markets revived late in the first quarter and companies rushed to issue new debt. BNP Paribasand Deutsche Bankseem to have won business in their domestic markets as rivals from London and New York retreated to focus on their own core clients.

Big U.S. banks had been competing fiercely in Europe, particularly in investment banking.

Faced with this stiff competition, as well as slow growth and ultralow interest rates, many European lenders have scaled back their global investment-banking ambitions over the past five years and refocused on their home markets. The latest crisis only seems likely to reinforce this long-term trend.

For country leaders, it has been helpful to lean on local banking executives in a crisis. A pan-European behemoth—with divided loyalties and multiple political masters—would likely face opposition at the national level, even if regulators in Brussels and Frankfurt might welcome it.

While the conditions might soon be ripe for banking consolidation in Europe, domestic tie-ups are still the best investors can hope for.