Bank-to-bank M&A a total bust

7 min read

I read with interest the other day reports of SG boss Frederic Oudea and his UniCredit counterpart Federico Ghizzoni agreeing that bank consolidation is way down the agenda and it’ll be another five years before it takes off in Europe.

The two CEOs were among a roster of senior bankers, regulators and politicians speaking at Handelsblatt’s Banking in Turmoil (Banken im Umbruch) conference in Frankfurt last week.

Alas, I wasn’t there so I’m not entirely sure of the tone or exact orientation of Oudea or Ghizzoni’s comments or their phrasing. But I must say the way the comments were framed came across a little odd. Not to cast any aspersions on their views on the European banking landscape – they clearly know their subject – but my issue with the context in which their comments were reported is that no one is suggesting at this point that banking consolidation is remotely on the cards.

Even if banking profitability and returns are on the up and up and growth in Europe is starting to stir in certain corners, that’s just not where we are in the cycle. In fact, I’m not sure if it’s even a cyclical matter given concerns about too big to fail, other regulatory impediments, the not always immediately obvious benefits of bank mergers and of course the rocky time bank mergers have historically had. (And I’m not just referring to RBS/ABN AMRO).

I reckon we’ll see scant action in large-scale cross-border bank-to-bank M&A going forward. What there has been this year and will be in years to come is an ongoing string of topping and tailing of minority stakes, loan portfolio and branch sales, non-core business division offloads, non-core country exits, and a constant stream of largely domestic and mainly small-scale (and predominantly US) bank M&A. Oh yeah and the striking shift of banking assets into the non-banking sector will run and run.

Trawling through the M&A deals data, the almost complete absence of classic cross-border bank-to-bank mergers this year is arresting, even with the expectations filter set to ‘low’.

Forgive the data dump here but bear with it as it tells the story very eloquently. FIG M&A volumes so far this year amount to US$265bn, up 16% year-on-year, and the Thomson Reuters M&A database logged 3,064 separate transactions between January 1 and September 7. Of those transactions, though, 1,811 have no value assigned to them or had no terms disclosed, while 990 are logged at less than US$100m.

Nothing wrong with any of the above but I wanted to focus on chunkier deals with disclosure so I didn’t consider them. That already leaves very little.

Some 16% of deal flow (357 deals and US$42.5bn in value) involves China. Going through China M&A deal by deal is like death by a thousand cuts. Transactions like BBVA’s sale of a 4.9% stake in CITIC Bank to local player Xinhu Zhongbao for US$1.7bn; Intesa Sanpaolo Vita’s sale of its 19.9% stake in China’s Union Life Insurance (US$183m), or Bank of Communications’ acquisition of 80% of Brazilian bank Banco BBM (US$173m) are relatively rare.

As, actually, are the waves of outbound acquisitions undertaken by the likes of Fosun and Anbang. In truth, the vast majority of China FIG M&A involves an impenetrable knot of domestic minority stake peddling with the hand of the State never far from the surface.

Away from China, the global insurance sector has been making good running year-to-date, clocking up around a quarter of deal volumes. Insurance M&A accounts for six of the 10 biggest FIG deals this year. ACE’s US$28.5bn bid for Chubb is the year’s biggest FIG transaction so far, while the likes of Zurich/RSA (US$8.7bn); Tokio Marine/HCC (US$7.5bn); EXOR/PartnerRe (US$6.7bn); Sanyou/Meinian Onehealth (US$6.49bn); Meiji Yasuda Life/StanCorp (US$4.96bn) and Sumitomo Life/Symetra (US$3.8bn) all make the top 20.

Slim pickings

But once you weed out non-insurance non-bank deals, loan portfolio sales and largely small-scale mainly domestic bank deals, you’re left with barely a handful of those original 3,000+ deals worthy of mention in a banking context. Once you get through RBC’s takeover of the US’s City National Corp, the biggest (barely) cross-border bank-to-bank deal at US$5.4bn; HSBC’s sale of its Brazil unit to local behemoth Banco Bradesco for US$5.2bn (not cross-border); or – a classic M&A trade – Banco Sabadell’s acquisition of the UK’s TSB for US$2.5bn, you’re basically done.

Worthy of mention due to their size are Springleaf/OneMain Financial and BB&T/National Penn Bancshares in the US; Cosmos Bank’s purchase of China Development Industrial Bank in Taiwan; Polish insurer PZU’s purchase of a stake in Alior Bank, Aareal/WestImmo in Germany, and Bank of Yokohama/Higashi Nippon Bank in Japan. After that, you really are done.

So here are my questions. Will intra-European bank mergers of scale ever make sense in the New World of banking, even when banks are through deleveraging, re-strategising, re-calibrating and re-wiring?

Will trade buyers have the appetite to out-bid private equity, hedge fund, insurance and other non-bank buyers, which seem to have got themselves into the groove and are bidding actively for banking assets? My answer to both is: I wonder.

Beyond anything else, banks have spent the past few years trimming and slimming, cutting costs and overhead. Will they want to go through it all again: consolidating front, middle and back office operations and IT etc at the same time as keeping on the right side of regulators?

Equally to the point, will they want to attempt to merge cultures – particularly when they’ve been under so much pressure and are struggling to come to terms with the elevated importance ascribed to culture and governance by regulators and politicians? And – a sign of the times – will they want to risk owning past wrongdoing at some point in the future given the massive liability of fines risk?

People say that a single supervisory mechanism in Europe, the onset of growth, and finality around capital, liquidity, leverage and resolution could presage a wave of consolidation. My answer is: why? People also talk about banks buying into banks in, say, Germany as a growth play. I’m not seeing it; the action is just as likely or more so to come the other way.

So what’s the conclusion: scale banking mergers at this point look like an anachronism against today’s backdrop and amid prevailing conditions. The drivers that exist in other sectors just seem to be absent. Organic growth anyone?

Keith Mullin