Mergers and acquisitions (M&A) among European banks have surged in recent months, with new rumors or attempts of takeovers emerging almost weekly. This acceleration suggests a shift in motives—are we moving from consolidation and rescue deals to a wave driven by hubris and extravagance ? In this note, we assess the characteristics of this new trend and its broader implications for bondholders.
KEY TAKEAWAYS
- The ‘rescue’ M&A era is long gone.
- M&A consolidation: a phase coming to an end?
- The return of the M&A driven by hubris?
THE ‘RESCUE’ M&A ERA IS LONG GONE
The Great Financial Crisis (GFC) of 2007-2009 was an upheaval for the global banking industry. While the largest US and UK institutions were forced into urgent mergers, banks across continental Europe experienced a wave of nationalisations and massive bailouts. The aftermath of the euro crisis exposed regulatory and balance sheet weaknesses of European institutions, while almost all banks in the so called ‘peripheral’ countries lost access to the interbank market, forcing them to rely on liquidity from the ECB and their national central banks to survive.
The introduction of Basel III solvency and liquidity standards, as well as the creation of the ECB's Single Supervisory Mechanism (SSM), accelerated mergers in some of the most fragmented banking sectors, such as Spain and Italy, with most savings banks in these two countries seeing major transformations. Banks had to merge to survive. Some institutions were unable to escape liquidation (Banco Popular, Venetian banks in Italy, etc.), while others have had to withhold dividends from shareholders for many years to form capital buffers in line with growing regulator demands. Many banking groups also exited what they considered to be ‘non-core’ markets, refocusing on their home markets and lowering their leverage levels. We do not believe that this type of M&A has occurred since 2019, with the notable exception of the Swiss bank Credit Suisse, which UBS urgently absorbed in early 2023 due to its major governance and liquidity deficiencies.
M&A CONSOLIDATION: A PHASE COMING TO AN END ?
Banks' profitability was severely hampered by a low-interest rate environment until 2022; high-cost structures (especially in retail banking, with the growing rationalisation of branch networks and competition from online banks); large provisions for credit and litigation risks; and considerable reserve requirements to ensure comfortable capital ratios. The race to for size thus became a crucial factor in ensuring economies of scale and cost savings. Once again, the Spanish and Italian banking sectors were at the forefront of this shift, particularly with the merger between CaixaBank and Bankia (2020-2021), and Intesa Sanpaolo's hostile takeover bid for UBI Banca (also in 2020-2021). The challenge was to establish a dominant position in their local markets, while benefiting from a more merger-friendly regulatory and accounting environment (formation of badwill and use of deferred tax credits) and less complex balance sheets. The ‘Too Big To Fail’ philosophy, once a guiding principle for regulators, was left behind with the approval of regulatory and supervisory authorities. In addition to consolidating leading and second tier players, many banks also adjusted their balance sheets according to their competitive advantages, strengthening or scaling back specific activities (consumer loans, credit cards, car leasing, etc.).
However, the race for size has limits , such as hostile takeovers for systemic institutions. Deutsche Bank was unable to convince the German authorities of its plans to acquire Commerzbank in 2019, due to the risks of significant layoffs on the transaction, as well as uncertain synergy targets due to the very low intrinsic profitability of the German retail banking sector. While BBVA's hostile bid for Banco Sabadell is less problematic from a systemic point of view, the complexity and size of the offer launched in May 2024 requires numerous approvals and lobbying battles, which could ultimately discourage BBVA if the authorities decide to impose asset disposals to validate the deal. It therefore seemed easier to consider consolidations for second tier banks, such as UK’s Nationwide and Coventry Building Society, which announced their acquisitions of Virgin Money and Co Op Bank in the first half of 2024 (see chart in the appendix for more details), and more recently Danish bank Nykredit with Spar Nord Bank.
The conclusion seemed clear: it was easier to consolidate domestically than internationally, especially for financial reasons (the need to maintain substantial and separate solvency and liquidity ratios in each country, the regulatory complexities regarding the scope of bank resolutions, the incompleteness of the European Banking Union on the guaranteed deposits fund, and less obvious synergies).
THE RETURN OF THE M&A DRIVEN BY HUBRIS?
The Italian bank UniCredit, whose retail bank is active in Germany and Austria, entered the large-scale M&A scene with a bang, quickly acquiring a stake in Commerzbank's capital in September 2024, provoking the ire of German politicians and the German bank’s management. Some statements could even be interpreted as contempt, or worse, for the intentions of an Italian bank towards a German bank1. The opposition quickly became political rather than financial, highlighting nationalist tensions as an additional obstacle to transnational mergers. Although it is easy to criticise the German position, let’s ask ourselves: What would be the political and economic reactions if a large foreign bank wanted to acquire a French bank such as Société Générale?
Acquire abroad? Yes. Be taken over by foreigners? No thank you.
Andrea Orcel, the CEO of UniCredit, felt that his M & A project in Germany was at best delayed by the upcoming elections, so he set his sight on the Italian bank Banco BPM in November 2024, just 12 days after the latter announced a takeover bid for the asset manager Anima. Leading a bank acquisition project is already a major ambition in itself, but pursuing two simultaneously seems almost unrealisable—if not a sign of excessive hubris from its leader, eager to offer shareholders a new narrative, while the expected decline in European interest rates threatens to impact banks' net interest margins.
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