Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
CommentJuly 4 2018

Europe primed for wave of banking consolidation

A decade after the crisis, consolidation might mean a healthier bank industry. 
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

The time is ripe for more merger and acquisition (M&A) activity in Europe’s banking sector. After some 10 years of wariness of ‘too big to fail’ financial institutions among regulators and politicians, the mood is changing.

It is possible to have too much of a good thing – as regulators such as Danièle Nouy, the European Central Bank’s (ECB's) chair of the supervisory board, agreed when she referred to overbanking in Europe in a speech in September 2017. There are too many banks competing for customers and many lenders are not earning their cost of capital.

The answer could be consolidation, as well as a weeding out of unsustainable institutions, to improve the overall health of the industry.

Both are stimulated through initiatives such as the ECB's and European Commission’s work on non-performing loans (NPLs). This has come in two ways: by improving an institution’s asset quality and, thus, making it more attractive to potential buyers; and by showing off those lenders who might not be viable going forward .

But it is the drive to create a banking union in Europe to reduce the sovereign-bank nexus that has been the most prominent factor in changing attitudes towards bank M&As, including cross-border mergers. With the way paved for such deals in Europe, all that is now needed is banks that are brave enough to take the plunge.

For senior management at Europe’s banks, increasing costs and squeezed margins due to regulatory pressures and low interest rates are increasingly the strongest arguments for trying to achieve greater market shares. Ever-faster changes in technological advances and a need to keep up with latest developments and security requirements are another factor.

It therefore did not come as a surprise when the UK’s Clydesdale Bank and Virgin Money Group announced their merger in June. Still, while the Clydesdale/Virgin combination significantly increases the capitalisation and asset base of the combined lender, the new bank will be the UK’s 10th largest bank by Tier 1 capital when looking at year-end 2017 data – the same position Clydesdale Bank currently holds. And it remains an intra-UK merger.

On top of this, bigger deals seem more imaginable. Germany’s Commerzbank is still state owned, and a potential combination of France’s Société Générale and Italy’s UniCredit has also been mentioned – the combined group would have had $125.57bn in Tier 1 capital at the end of 2017, making it Europe’s second largest bank behind HSBC according to The Banker's Top 1000 World Banks ranking for 2018. A tie-up between Barclays and Standard Chartered has also been mooted.

So speculation will be mounting regarding which will be the next brave banks to make an M&A move – as the feeling is that there are bound to be more in 2018.

Was this article helpful?

Thank you for your feedback!