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Western EuropeApril 4 2004

Pan-European M&A unlikely but Germany in need of consolidation

Despite the kickstart to merger and acquisition (M&A) given by two high-profile US deals, a report from Fitch Ratings last month stated that a growth in cross-border consolidation among financial institutions in Europe is unlikely. The report said that Europe was still fraught with regulatory, fiscal and cultural barriers, “not to mention a lack of any realistically achievable synergies”.
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Instead, the ratings agency highlighted the obvious need for large-scale domestic consolidation in Germany – although it is complicated by the existence of three different banking sectors – and, to a lesser degree, in Italy.

After two years of loan portfolio clean-ups and rationalisation measures, many German banks are in a healthier shape than they have been for some time and speculation about consolidation is heating up, said Fitch.

According to the agency, the debate splits into two camps: the first believes that foreign banks will start to move into the German market – and in recent months, both Credit Suisse and Royal Bank of Scotland are said to have expressed interest – the second considers that any major M&As will be between domestic banks.

Fitch says that the second scenario is the most likely. “While foreign banks may try to get a foothold in the German market, it is more likely that they will go for smaller targets or expand existing operations. For example, JPMorgan and Credit Suisse have both stated that they want to beef up their private banking operations in Germany, while ABN Amro has acquired the small private bank, Bethmann-Maffei from HVB.” In our opinion, it is unlikely that a foreign bank will go for one of the major players,” said the report, adding that lacklustreprofitability, structural weaknesses and cultural and operational differences will put potential buyers off for some time.

Any consolidation is likely to be intra-sector, said Fitch. It does not foresee in the short term any major transactions between a bank in the savings sector with a bank in either the co-operative or private sector, although it believes that ultimately, this sort of transformational deal will occur. “The attempt by the owners of Sparkasse Stralsund in Mecklenberg-Pommern to sell it to a private commercial bank – Commerzbank, HypoVereinsbank and Deutsche Bank are reported to be interested suitors – has highlighted the problems of cross-sector consolidation,” said Fitch.

In the private sector, there have been no major M&A deals since the Allianz/Dresdner transaction in 2001 and that has been a difficult marriage.

Last month, however, Allianz confirmed its support for the bank and says it has no intention of selling or merging Dresdner Bank with another institution.

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Read more about:  Analysis & opinion , Western Europe , Germany