Whisper it, but bank mergers and acquisitions (M&As) may soon stage a comeback in Europe.
The taxpayer bailouts following the global financial crisis all but killed sizeable M&A in the banking sector. Creating more systemically important behemoths would, after all, be squarely at odds with policy-makers’ too-big-to-fail mantra, which has dictated a large chunk of post-crisis regulation.
Deal making has continued, but it has been dominated by divestitures, restructurings and other transactions designed to fix balance sheets or offload struggling businesses. Macquarie’s acquisition of the Green Investment Bank, and Co-operative Bank’s potential sale in the UK are just two examples.
There is a change of tone within bank boardrooms in recent months, though, with more executives showing an interest in strategic, growth-oriented M&A. Rising growth forecasts and interest rates, alongside steepening yield curves, have undoubtedly helped – but so too have rumours of regulators softening their stance towards bank combinations.
Regulators still have little appetite for banks to increase in size and complexity, but it is understood that industry watchdogs are more open to the idea than they were 12 months ago. Bankers say there is an unofficial asset ceiling in Europe of about $2000bn – indeed, the continent’s largest lender, HSBC, owns $2375bn in assets – so the big universal banks may not participate. There is thought to be little appetite among US banks, so intra-regional and inbound investment from Asia are tipped to dominate.
Notwithstanding the fact that many banks are slimming down, there is a clear business rationale for lenders to be of a certain size. Thanks to Basel III, banking has joined the likes of aviation and oil and gas as the world’s most capital-intensive industries, which are also the ones that benefit most from economies of scale. In addition, no bank owns more than about 5% of the European deposit-base, while some US banks own about 10% of domestic deposits.
By the end of 2017, hopefully banks will be able to think more about strategy and less about regulations. It would mark a turning of the tide for acquisitive lenders, and signal that the next big European bank M&A deal is no longer a question of ‘if’ but ‘when’.
