Will there be ‘one last wave’ of domestic bank mergers in Europe?

The latest wave of European bank M&A got off to a stuttering start in early May when BBVA’s share price fell on its announcement of a bid for Banco Sabadell. Sabadell’s board then rejected the offer, and even the Spanish government said it would oppose it.

But the fact that BBVA has come back to the deal – four years after walking away and so far as going hostile and taking the offer straight to shareholders – demonstrates a new level of determination to get bank M&A done in Europe.

Hostile bank M&A deals are rare, especially in Europe, as they make due diligence so much harder. The integration process will also be harder, while hostile bids often require a higher premium than friendly deals.

Given the power of regulators in banking, if a host government so much as hints at its opposition, acquirors will often back off.

But there are examples of successful hostile bank M&A deals in the sector: most recently Intesa Sanpaolo’s 2020 takeover of UBI Banca.

Bankers on both sides of the BBVA-Sabadell deal say that once a bid like this is launched, the state has less influence over the situation unless there are compelling competition or prudential reasons to block it.

Concern about regional employment in Sabadell’s Catalan base might not be enough, in other words.

If a sufficient proportion of Sabadell shareholders back the acquisition, this could be seen as a sign that European banking is moving beyond the sort of local interests that previously held back both domestic and cross-border M&A on the continent.

Retail shareholders have long held a high proportion of shares in Spanish banks, especially Sabadell, which is 48% owned by retail, compared with around 40% at BBVA and much lower proportions in most other European banks. That makes it easier for Sabadell’s board to appeal to a desire for Catalan banking independence. But BBVA only requires 50.1% approval to go ahead with the purchase.

Mexican billionaire David Martínez, Sabadell’s second-largest shareholder, has reportedly signalled he supports the deal.

Relying on retail investors has become increasingly difficult over the past decade, as these buyers lost so much money in episodes such as Bankia’s 2011 IPO in Spain and the later subordinated debt bail-ins of some smaller Italian banks.

Meanwhile, comments by French president Emmanuel Macron apparently supporting cross-border M&A – including takeovers of French banks – have fuelled a rally in the share prices of Commerzbank and Societe Generale over the past few weeks, even if SocGen’s size and the power of French workers give it a large degree of protection.

Talk about cross-border deals also has implications for ABN Amro, which is a potential target for BNP Paribas.

Macron’s comments speak partly to the way large cross-border deals work in practice in Europe. They need to be seen as reciprocal. If Italy cedes one of its national champions to a French firm, France might need to cede one of its own champions, perhaps to an Italian.

According to a senior banker specialising in financial institutions M&A in Europe, the continent may be at the start of “one last wave” of domestic mergers, before cross-border deals go ahead.

One idea is that these domestic deals will help lay the basis for some of the same banks to engage in cross-border acquisitions in future. BBVA, for example, has defended its acquisition of Sabadell by saying it aspires to be the eurozone’s biggest bank by market capitalization (today, it is the fifth).

The same could perhaps be said about UniCredit, as it still faces questions about whether it has a sufficiently large market share in Italy.

After Sabadell, other domestic M&A candidates are especially concentrated in Italy, notably Banco BPM and Banca Monte dei Paschi di Siena, which the Italian government is in the process of privatizing.

There remain plenty of sceptics about the prospect for cross-border M&A in Europe. Branch overlaps are smaller, while integrating back- and head-office operations is more difficult. Perhaps it will remain that way, given national linguistic and cultural differences, as well as legal differences around things such as insolvency, consumer protection and workers’ rights.

The chairman of one large European bank recently told Euromoney that talk about reviving the capital markets union has come mainly because European Union officials have largely given up on completing banking union with common deposit insurance.

Nevertheless, particularly after negative interest rates made it clear that European banks had a profitability problem, there is a consensus among financial policymakers at the European level that more domestic consolidation is needed because of the scope for merger synergies.

Pan-European bank M&A, moreover, plays into the EU’s institutional desire for greater financial integration, especially within the eurozone.

“M&A and consolidation would be very welcome once we make sure that the project results in a more robust bank or entity than the separate entities,” José Manuel Campa, chair of the European Banking Authority, told Euromoney in a recent interview. “We need to think about the underlying result of the project that will result from consolidation, especially if it deepens the single market in Europe. We could see cross-border consolidation as a strong sign if it were to materialise.”

Campa, unsurprisingly, puts forth some caveats: “Consolidation for the sake of consolidation is not good. Consolidation that promotes efficiency, integration and better service to customers is good. Consolidation that involves a good bank taking over a less good bank, when the resulting institution is managed better, is also good. Consolidation that results in market power by banks at the cost of customers is not good.”

But the overall atmosphere is a long way from the reaction to the merger that created Banco BPM in 2016, when the European Central Bank demanded a €1 billion capital raising from the acquiror, seen as putting off similar deals.

The share prices of European and especially Spanish and Italian banks had a remarkably good run in early 2024. Although European banks are still trading at a slight discount to book value in early June – unlike North American banks – they are now about as profitable as their North American peers, which was far from true a few years ago.

Both sectors will post a return on equity of around 13% in 2024, according to research from Citi.

Investors might have finally begun to accept that credit losses might not be about to wipe out all the interest-margin gains that banks – especially in southern Europe – have had from higher interest rates. Cost cuts triggered by European banks’ dire profitability when rates were low have clearly helped, while credit policies have also been more cautious than in previous decades.

The question has now become whether better valuations might allow a pivot to growth, including M&A.

The chief financial officer of a large southern European lender recently told Euromoney that there had been a change this spring in “the market thesis” around European banks.

“The cost of capital of comes down and the risk perception improves in the banks,” said the CFO, talking about the effect of relatively high interest rates and low unemployment. “Future growth is worth much more. Those banks that offer growth are worth more.”

This sounds optimistic, given the share-price reaction to the Sabadell bid. Investors were clearly concerned about the implications for BBVA’s capital-returns policy.

Nevertheless, concern about unemployment and non-performing loans has previously held down southern European banks share prices to a greater extent. That is one reason why buying weaker mid-tier banks seemed so much riskier to firms such as BBVA and UniCredit three or four years ago, when Covid-19 was still raging.

“Share buy-backs have helped European banks’ share prices, but they need to measure buybacks against other ways of deploying capital, including to help their industrial rationale,” says Sebastiano Pirro, chief investment officer at financials-focused Algebris Investments. “As banks’ price-to-book values rise, buying back their shares becomes a less obvious thing to do, and M&A becomes a more obvious alternative.”

European banks still trade at low price-to-earnings multiples, perhaps helping Sabadell and others to argue they would be selling on the cheap. The sector trades at around eight times earnings, compared to 11 times earnings in North America, according to Citi.

On the other hand, capital is much less of a concern for both supervisors and investors than it was a few years ago, partly thanks to asset sales – notably BBVA’s $10 billion exit from US retail to PNC. Average core tier-1 capital ratios are now around 14% in Europe, according to Citi. This, indeed, is the main reason why M&A is on the up, according to another investment banker covering financial institutions.

“Financial regulators don’t love it when banks pay out all their earnings to shareholders,” says one banker. “As they’re more supportive of mergers, there’s a portion of capital that can’t be used for dividends and share buybacks but could be used for M&A.”