Brian Caplen blog 2016

Merger talks between Spanish lenders Bankia and CaixaBank have put European banking consolidation back in contention – but only domestic deals will probably go ahead. 

Let’s not forget the formidable list of challenges facing European banks – rock-bottom interest rates, bad loans from the pandemic heaped on top of those they still have from the financial crisis, higher compliance and capital costs, the challenge of new technology. As a result, European banks have the lowest return on capital of any region at 6.71%, half the figure for North America, according to The Banker Database (see table).


Analysts often argue the case for M&A as a way of boosting returns but bank executives are usually more cautious pointing to the risks of mergers, especially cross-border ones. Regulators tend to worry more about the downside risks than the upside gains, yet in July the ECB signalled a more pragmatic approach on the basis that deals have the potential to strengthen the financial system.

It seems as if Spanish banks were listening carefully. CaixaBank and Bankia which place third and fourth in The Banker’s ranking of Spanish banks by Tier 1 capital have announced they are in merger talks. The potential merged entity would have the largest domestic market share in lending and deposits – 28% and 30% respectively compared to 19% for loans and 20% in deposits for Santander, according to Berenberg’s figures – but would still be behind Santander and BBVA in Tier 1 terms. These latter two banks have large international operations.

The big question, then, is whether this deal, if it happens, is a one-off or the start of a broader consolidation first within European countries and then across the eurozone. More in-country deals seem likely, and in Spain last year’s merger discussions between Unicaja and Liberbank could be restarted and Sabadell could be a fit for Santander since both banks have UK operations. On that one, however, Santander has said it is not currently looking at acquisitions. 

But cross-border deals are another matter. There is less scope for synergies and taking out costs and the challenges of getting different IT systems to work together is huge. Furthermore, cross-border deals really need a complete European banking union before they start to make more sense.

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

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