Crédit Mutuel Asset Management: Should we fear European banking M&A?

February 14, 2025

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 bank. 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.

Since November 2024, the M&A race in Italy has taken off in all directions, with Crédit Agricole increasing its stake in Banco BPM to defend its existing shareholding and distribution agreements. At the same time, Banco BPM and Anima (which, as a reminder, is subject to takeover bid by Banco BPM) have jointly increased their stake in Banca Monte dei Paschi di Siena, as the Italian state gradually reduces its involvement. In January 2025, Italian bank specialising in the management of non-performing loans, Banca IFIS, announced a takeover bid for its rival, fellow Italian, Illimity Bank, while Banca Monte dei Paschi di Siena (BMPS) announced at the end of the month that it intends to make a takeover bid on Mediobanca. The latter is perhaps the most surprising, as BMPS has always been a target on the Italian market, but it is likely that the coordinated action by the Italian state and major shareholders of the bank (who are also major shareholders of Mediobanca) could have changed the plans. In addition to a proposed purchase price which is now below the current price of Mediobanca, BMPS’ statement mentions cost savings through very optimistic synergies, given the very weak complementarity between the two banks, which largely explains the stock market's negative reaction after the announcement. In this case too, political interests may have prevailed over financial sense. Mediobanca’s board promptly rejected the offer, judged as value-destructing, and highlighting, between the lines, conflicting shareholder interests.

While hostile M&A was taboo in the banking sector a few years ago, it is now the norm, as we see banks mentioning the word increasingly. Absorb to avoid being absorbed. We believe that the history of European bank M&A's over the past decade has been very strong, supported by integration and reasonable acquisition prices, supported by low equity multiples for most European banks. However, it is worth considering whether such discipline should be maintained in possible future transactions, given the sense of urgency shown by the management of the European institutions. It is not a question of whether banks can integrate other banks, but of looking closely at acquisition prices and the synergies on offer.

The circumstances are very different from the pre-GFC period, but the European banking sector already experienced a period of unrestrained M&A activity until 2007, with expansion into areas where profitability was expected to be higher, and with high acquisition prices without this being a problem, given that European banks' Return on Equity was in double digit at the time, and capital requirements were minimal (goodwill premiums even counted as regulatory capital, which encouraged high acquisition multiples). The most emblematic case of the M&A euphoria at the time was Banca Antonveneta, which was acquired by ABN Amro in 2005 (the first foreign bank to own an Italian bank), before ABN Amro itself was bought by Royal Bank of Scotland, Banco Santander and Fortis in October 2007, and then Santander sold the part of Banco Antoveneta’s it had inherited just a month later, in November 2007, for around EUR 9 billion to BMPS, which would later pay a very heavy price for it.

Recent rumours suggest that the French bank BPCE may be interested in Portuguese bank Novo Banco, which its majority shareholder is planning to IPO or sell. BPCE currently has no real presence in retail banking in Iberia, apart from activities mainly linked to Natixis. On Crédit Agricole’s side, its stance is currently rather defensive with its capital increases in Banco BPM, but a stronger involvement, or even a white knight role, could potentially fall to it depending on the outcome of UniCredit's takeover bid. It may be tempting to draw parallels with the unfortunate adventures of French banks outside their borders in the aftermath of the euro crisis, such as Emporiki in Greece for Crédit Agricole, but we believe that French banks are taking a cautious approach to the current turmoil in the European banking landscape.

Finally, while M&A is trending among banks, it can also involve asset managers (AM), because a bank acquiring an AM can do so through its insurance subsidiary, which allows it to obtain favourable regulatory treatment (this is known as the Danish Compromise). This is why BNP Paribas is in the process of merging with AXA IM through its insurance subsidiary Cardif. The same goes for Banco BPM and its takeover bid for Anima. If we also consider the establishment of a joint venture between Generali and Natixis on their AM activities or the fact that Allianz would be ready to sell all or part of Allianz Global Investors, there is no doubt that asset management activities will be at the center of future M&A movements by European banks.

Conclusion

At a time when the finalisation of the Basel III rules is at a standstill, depending on Donald Trump's position on their future, and when European states continue to withdraw from the banks they had to rescue after the GFC, such as AIB in Ireland, Commerzbank, several Greek banks, BMPS, etc., other maneuvers are undoubtedly being prepared. Given the accelerated pace of recent developments and the ongoing shareholder battles, higher acquisition prices can be expected. The advantage of the banking sector is that it remains a heavily regulated sector, and that regulatory authorities will never allow a buyout that would substantially weaken the acquiring bank's excess capital buffers (whether in terms of the Common Equity Tier 1 ratio or other metrics such as the Basel III leverage ratio and MREL ratios, which require banks to maintain loss-absorbing liability buffers in the event of resolution). This moat is paramount and is combined with additional solvency and leverage ratio requirements for larger institutions (global or local systemic institutions in regulatory terminology), which may also deter certain mega-mergers.

The great strengthening of European regulatory and supervisory standards over the past fifteen years has allowed banks to use M&A to survive. It is now intended to allow a higher level of profitability to be maintained to offset the expected gradual decline in net interest margins at a time when the profitability gap with US banks remains clear. The banks' significant capital surpluses provide more flexibility in their acquisition intentions and could therefore lead to higher acquisition multiples. While the pro forma creditworthiness of the combined entities is generally easy to assess, the longer-term impact on profitability depends in part on the synergies that have been developed, which could be reduced if transactions are approved on overly optimistic terms. While this profitability issue is primarily a concern for shareholders and less so for bondholders, we are mindful that an issuer's reputation also influences the level of its bond spreads, especially in the event of financial decisions considered imprudent. So far, we are not overly worried about recent announcements of takeover bids in the banking sector, but some are starting to raise our eyebrows.

As bond managers, mergers and acquisitions generally have a positive impact on an company's financial ratings (the lowest rated companies tend to move closer to the highest rated company, which is often the acquiring entity, rather than the opposite). Larger banks generally have easier access to the bond market, especially for subordinated debt issues, as they can issue larger amounts (issues of EUR 500 million or more, known as benchmark issues), which are therefore more liquid and issued at theoretically somewhat lower spreads due to a perceived lower illiquidity premium. This easy access could allow the emergence of new subordinated debt issuers (for example, neither BMPS nor Mediobanca have any AT1). Finally, the larger the balance sheet of an issuer, the more additional tier 1 (AT1) securities are outstanding (and often in excess of the recommended regulatory minimum). However, it is easier for a bank to manage the refinancing of several AT1s on an ongoing basis than to have only one outstanding, whose refinancing capacity is more dependent on a specific and unique market window. We therefore believe that larger banks tend to have a better track record of exercising AT1 and Tier 2 call options than smaller banks.