Since the financial crisis big banks have got bigger and this trend is set to continue. Get ready for the next round of banking M&A, writes Brian Caplen.

Regulation has made cross-border bank mergers more difficult (although also more desirable, as regulation bears down on profitability). Even for domestic mergers, the IT challenge of putting together different systems is a nightmare that could easily dissuade the faint hearted. Regulators worried about too big too fail should, arguably, be taking a hard line.

Yet in spite of all this, the newspapers are full of merger speculation. This is especially true in Europe, which currently only has HSBC as a representative in the top 10 global players (as recorded by The Banker’s Top 1000 World Banks 2017 ranking, which will be updated in the July 2018 issue of The Banker). The US has four banks in the top 10, in the form of JPMorgan, Bank of America, Citigroup and Wells Fargo.

The Financial Times reports that Italy’s UniCredit (placed 45th in the 2017 Top 1000) and France’s Société Générale (ranked 24th) have been considering a merger, which follows an earlier report of a possible tie up between Barclays (ranked 18th) with Standard Chartered (ranked 38th). By simply summing up the capital of the individual players (consolidation usually results in a 20% to 30% drop in overall capital) this would result in two large European banks hovering on the edge of the top 10, which in 2017 saw Japan’s Mitsubishi UFJ in 10th place with $135bn in Tier 1 capital.

In the UK, the owner of Clydesdale and Yorkshire Banks is bidding for Virgin Money, which would result in a combined entity still much smaller than the main UK retail banks but significantly larger than most of the challengers.  

Bank mergers are fraught with risk, with one recent example being the IT problems suffered by the UK’s TSB as it tried to migrate systems from previous owner Lloyds to those of new owner, Spain’s Sabadell. Then there are the challenges of downsizing the labour force in countries such as France and Italy, which have strict employment rules, and of cost savings, more generally, that typically come in below estimates.

Yet still CEOs are not deterred. Clearly the driving force of trying to create returns in a sector where profits have been under huge pressure is of greater consequence than any short-term IT or regulatory difficulties.

Analysts have been calling for consolidation in Europe for some time and at the eurozone political level it is clear that cross-border banks would strengthen the banking union and the single currency. So EU regulators are on side, too, with moves afoot to treat cross-border exposures similar to domestic ones and to set up a common backstop for the Single Resolution Fund. All very positive for European M&A.  

Expect to read more headlines on banking mergers in the weeks and months ahead.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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