Why It's So Hard to Build a Banking Giant
June 13 2018 - 5:59AM
Dow Jones News
By Max Colchester and Patricia Kowsmann
The boss of French bank Société Générale SA met advisers over
several weekends to war-game plans for a megamerger with Italy's
UniCredit SpA. That was more than a decade ago.
Today the two banks are still eyeing each other. But prospects
for a deal remain far off. And that in a nutshell is the state of
European big-bank consolidation. Lots of talk, but little
action.
European officials want big lenders to merge, arguing for a
muscular pan-continental bank to take on U.S. rivals like JPMorgan
Chase & Co. and Citigroup Inc. The relative size of banks on
opposite sides of the Atlantic puts the challenge in relief:
JPMorgan has a market value of $377 billion. The eurozone's
biggest, Banco Santander SA, is worth $92 billion.
That has led bankers to engage in a round of bank-merger fantasy
football.
The Société Générale deal with UniCredit might be another 18
months away, say some bankers. Commerzbank AG, a potential merger
target since the early 2000s, could be melded with the
underperforming Deutsche Bank AG, analysts say, though that would
be unlikely until they finish respective restructuring efforts.
Other banks such as BNP Paribas SA are seen as possible
acquirers.
"In times of ever-deepening geopolitical tensions, do we want to
leave the important allocation function of the banking system
largely to foreign institutions?" Deutsche Bank's new chief
executive, Christian Sewing, said in a a speech in Berlin on
Tuesday.
The political push to create a European banking champion has
intensified. But a combination of local interests, byzantine
regulation and a failure to complete a much vaunted "banking union"
has left Europe's financial system deeply fragmented.
Europe has some banks with activities across multiple countries.
France's BNP Paribas has a big business in Italy, for example.
UniCredit has a substantial German bank. "So the question is
whether investors want these banks to get bigger," says Filippo
Alloatti, a senior credit analyst at Hermes Investment
Management.
The answer is not yet. European bank valuations remain low and
have dipped further amid political turmoil in Italy. Rules to
measure the riskiness of banks have been finalized, but the
sector's cleanup of bad loans has yet to be completed. So the
cross-border trophy deal remains a way off, analysts say.
"In Europe do we want to have large sophisticated investment
banks that can serve clients so we are not dependent on U.S.
banks?" says Shamshad Ali, a partner at PricewaterhouseCoopers LLP.
"If so, how do you achieve that position?
A prerequisite for big banking deals may be the completion of a
European "banking union," an effort begun in earnest when the
2010-2012 euro crisis exposed the fundamental weaknesses of the
bloc's financial system.
There is now a eurozone bank regulator in Frankfurt and a common
system to wind down failing banks. But other key pieces are
missing. A single European deposit insurance system, under which
the risk of bank failures would be shared among the 19 countries,
is at best, years away. Big mergers lack a clear rationale because
current rules make it costly for banks to shift funding across
Europe from where they are cheap to collect, in Germany say, to
where they can be lent out at a higher rate of interest, in
Southern Europe.
EU leaders are set to discuss the banking union later this
month, but Germany and others have repeatedly said countries need
to clean up bad loans first before any risk-sharing plans can move
forward. German Chancellor Angela Merkel has said a joint deposit
insurance was "in the distant future."
A power struggle between the Frankfurt regulator and the bloc's
disparate national central banks isn't helping. Local authorities
retain powers to stifle regulators in Frankfurt. For instance,
national authorities can order local banks to lower their exposure
to their own subsidiary in another European country.
Another impediment: Under international bank capital rules, a
big bank with cross-border businesses is seen as riskier so needs
to hold a thicker capital cushion. To that end, the European
Central Bank has suggested the eurozone's 19 countries should be
considered one -- without borders -- for regulatory purposes, much
like the U.S.
Investors are still recovering from the last wave of European
bank M&A, which culminated in arguably the most catastrophic
banking deal ever done. In 2007 three banks bought Dutch lender ABN
Amro for $101 billion. Two of those banks, Royal Bank of Scotland
Group PLC and Belgium's Fortis, were then bailed out by
taxpayers.
The ensuing financial mayhem also ended the prospects of the
tie-up that's again on the table: Société Générale and UniCredit.
And that deal may be as far off as ever.
"I do not think that European cross-border mergers can happen in
the current environment," says Frédéric Oudéa, the chief executive
of Société Générale. "There are a series of barriers to be cleared
before considering such deals."
Write to Max Colchester at max.colchester@wsj.com and Patricia
Kowsmann at patricia.kowsmann@wsj.com
(END) Dow Jones Newswires
June 13, 2018 05:44 ET (09:44 GMT)
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