What buying Commerzbank would mean for UniCredit and German banks

UniCredit‘s move to take a stake in the German lender Commerzbank is raising questions about whether a long-awaited cross-border merger could lead to more takeovers and shake up Europe’s banking sector.

Last week, UniCredit announced that it had taken a 9% stake in Commerzbank, confirming that half of this stake had been acquired from the government. Berlin has been a major shareholder in Commerzbank since the bank injected 18.2 billion euros ($20.2 billion) to rescue the lender during the 2008 financial crisis.

UniCredit also expressed interest in a merger of the two, with the Italian bank’s CEO Andrea Orcel telling Bloomberg TV that ‘all options are on the table’ citing the possibility that it either takes no further action or buys on the open market. Commerzbank has responded lukewarm to the merger proposals.

Orcel said the Italian bank could buy 4.5% of the state’s stake in Commerzbank because the government trusts UniCredit, Reuters reported on Thursday, citing local media. Asked whether UniCredit would launch an unsolicited bid to buy out other investors in Commerzbank, the CEO told the Italian newspaper: “No, it would be an aggressive move.”

But analysts have welcomed UniCredit’s move, especially as a tie-up could spur similar activity in the European banking sector – which is often seen as more fragmented than in the US, with regulatory hurdles and past problems holding back megadeals .

So far, the market has responded positively to UniCredit’s move. Commerzbank shares rose 20% on the day UniCredit’s stake was announced. The German lender’s shares are up about 48% so far this year and up another 3% on Wednesday.

Investors appreciate the geographic overlap between the two banks, the consistency in financials and the assumption that the transaction is “collaborative” in nature, UBS analysts led by Ignacio Cerezo said in a research note last week. According to UBS, the ball is now in Commerzbank’s court.

Analysts at Berenberg said in a note last week that a potential merger deal “should in theory have a limited effect on UniCredit’s capital allocation plans.” They said that while there are “strategic benefits” in a deal, the immediate financial benefits for UniCredit could be modest, with the potential risks of the cross-border deal offsetting some of the benefits.

David Benamou, chief investment officer at Axiom Alternative Investments, called Orcel’s decision to take a stake in Commerzbank a “fantastic move” that makes sense because of the increase in German market share it would give UniCredit.

Because Commerzbank “missed costs in the second quarter [the second quarter]currently it is at a very low valuation, so the moment [Orcel] intervened is probably one of the best moments he could have,” Benamou told CNBC’s “Squawk Box Europe” last week.

When asked how imminent a takeover was in the near term, Benamou suggested it was possible, saying: “They’ll probably get around to it.”

According to Arnaud Journois, senior vice president of European Financial Institution Ratings at Morningstar DBRS, UniCredit is already on its way to becoming a leading bank in Europe.

He told CNBC’s ‘Street Signs Europe’ on Wednesday that there was a “double logic” behind UniCredit’s move, as it allows the Italian lender to access both the German and Polish markets where Commerzbank currently operates.

“UniCredit has been very active over the past two years and has made a number of targeted acquisitions… So this is the next logical step,” said Journois.

UniCredit continues to surprise the markets with some great quarterly earnings numbers. It deserved Last year 8.6 billion euros (up 54% year-on-year), which also satisfies investors through share buybacks and dividends.

Analysts hope a move by UniCredit will encourage more cross-border consolidation. European officials have increasingly commented on the need for bigger banks. For example, French President Emmanuel Macron said in an interview with Bloomberg in May that the European banking sector needs more consolidation.

“European countries may be partners, but they still compete sometimes. So I know that from the EU’s point of view – from the policy makers’ point of view – there is a need for more consolidation. However, we think there are a few hurdles that make that difficult. , especially in terms of regulations,” Journois told CNBC.

According to Reint Gropp, president of the Hall Institute for Economic Research, a cross-border merger between UniCredit and Commerzbank would be more preferential than a domestic merger between Deutsche Bank and Commerzbank.

“The German banking structure is long overdue for a consolidation process. In essence, Germany still has almost half of all banks in the eurozone, which is significantly more than its share of GDP. So any consolidation process would be welcome now,” Gropp told to CNBC. “Street Signs Europe” on Wednesday.

He noted that Commerzbank has always been a “major candidate for a takeover” in the German banking sector, as most other banks in the country are savings banks that cannot be taken over by private institutions, or cooperative banks that are also difficult takeover targets. .

Deutsche Bankwhich was still seen as the main contender to take over Commerzbank after an abrupt collapse of initial talks in 2019, could setting up your own defense strategy in the wake of UniCredit’s importance.

Filippo Alloatti, head of finance at Federated Hermes, said Deutsche Bank was unlikely to make a strong competitive bid for Commerzbank.

With a CET1 ratio of 13.5% compared to its target of 13%, Deutsche Bank is quite ‘constrained’. CET ratios are used to measure the financial strength of a lender. The German bank also has less excess capital than UniCredit and therefore “can’t really afford” a takeover, Alloatti said.

However, Deutsche Bank could put on a “brave face,” Alloatti suggested, and consider another target such as ABN Amro. The Dutch bank, that was it too rescued during the 2008 financial crisis by the state, has been the subject speculation about takeovers.

“We have been waiting for this,” Alloatti said, speaking of the potential for further consolidation in the sector. “If they [UniCredit] are successful, then other management teams will obviously study this matter,” he said, noting that there was also room for domestic consolidation in Italy.

Gropp acknowledged that UniCredit’s CEO had taken a “very bold step” that surprised both the German government and Commerzbank.

“But we may need a bold step to bring about any changes in the European banking system at all, and that is long overdue,” he said.

In comments reported According to Reuters, Commerzbank CEO Manfred Knof told reporters on Monday that he would review any proposals from UniCredit in line with the bank’s obligations to its stakeholders.

Knof informed the bank’s supervisory board last week that he would not apply for an extension of his contract, which runs until the end of 2025. German newspaper Handelsblatt reported that the council may be considering an earlier change in leadership.

Commerzbank’s supervisory board will meet next week to discuss the importance of UniCredit, people familiar with the matter who preferred to remain anonymous told CNBC. There are no plans to replace Knof once that meeting takes place, the sources said.

– CNBC’s Annette Weisbach, Silvia Amaro and Ruxandra Iordache contributed to this report.