WERE SOCIETE GENERALE boss Frédéric Oudéa and his UniCredit counterpart Jean-Pierre Mustier taking Mario Draghi at his word about Europe being overbanked and talking turkey on a merger that had a lot of people going in the past few days?
UniCredit shares were up 5.6% at one point last week, giving credence to something going on.
News of that particular marriage has been doing the rounds for ages, but since the two banks have super-glued their cards to their respective chests it’s hard to read between the lines of their silence and figure out if there’s anything new.
In any case we’ll have to wait first for the results of UniCredit’s Capital Markets Day on December 13, when Mustier unveils his strategic plans.
And the timing of his potential €13bn capital increase, which is the real block on any share-price appreciation. The timing of any merger is likely to come well after any new capital has been raised and the dust has cleared.
There’s nothing to get the market’s blood pumping quite like a bank merger. The Deutsche Bank and Commerzbank chatter recently (not long after John Cryan had called for more mergers in Germany) got everyone’s attention.
As did stories of Wells Fargo buying chunks of Credit Suisse’s investment bank earlier this year; or Barclays or Santander buying Deutsche Bank; or ICBC buying Standard Chartered or the rest of Standard Bank. Even my rather abstract piece in August suggesting Lloyds Bank was being eyed up by one of the major Chinese banks got some traction.
People like the SG/UCG tie-up because it has a certain resonance. The two top protagonists obviously know each other very well from when Mustier was running SG’s investment bank and Oudéa was climbing the slippery slope towards the corner office. That means they’ll be able to surgically cut through a lot of the cacophony.
The fact that SG’s arch-rival BNP Paribas owns Banca Nazionale del Lavoro may in the grand scheme of things be irrelevant, but the competitive symmetry nonetheless pushes observers into liking the SG move. The fact that SG chairman Lorenzo Bini-Smaghi is Italian pushes the idea even further.
From a business diversification perspective, having significant businesses in France, Germany, Eastern Europe, a resurgent (at some point) Italy, and merged hubs in the US and Asia-Pacific has its merits.
On the cost side, the ability to eliminate crossover in Eastern Europe and cut back SG’s Italian network (2,000 people) similarly has merits. Mind you, pushing the two investment banks together would be a bloodbath in areas such as capital markets where there is a lot of overlap. I note that UniCredit did some executive shuffling in its capital markets and syndicate area in the past week, a move attributed to succession planning in the corporate and investment bank. Interesting.
But regardless of the rationale, the devil as ever with these things is in the detail.
And in the case of large bank mergers, the devil means regulators, supplementary capital buffers and total capital stacks, Too Big to Fail, systemic inter-connectedness, as well as cultural and governance factors.
AS FOR MARIO Draghi, I think the fact the ECB president chose over-banking in Europe as the subject of the first part of his speech in September to the first annual conference of the European Systemic Risk Board (which he chairs) was notable.
As an aside, I’m not sure Draghi referring to capital markets in that speech as a useful “spare tyre” quite captures how important the push to diversify financing channels in Europe is. That said, he dislikes the pro-cyclicality of bank lending and the fact that intense competition is squeezing bank margins and lowering profits. (Of course, the other major factor undermining European bank profitability today is ECB monetary policy … but that’s Mario’s other hat.)
The focus of Draghi’s over-banking comments wasn’t large banks to be fair, but small and medium-sized banks outside the ESRB’s remit. But it strikes me the issue here is as much a structural-cum-cultural one, in that a lot of Europe’s banks are sewn into co-operative or similar networks.
In Germany, for example, the newly-merged DZ Bank/WGZ Bank combo sits atop a decentralised network of 1,000 Raiffeisenbanken and Volksbanken, just as the Finanzgruppe Deutscher Sparkassen- und Giroverband is the umbrella organisation for 600 German Sparkassen. Should each member be counted as an individual stand-alone bank? Not sure.
For the likes of Deutsche Bank in Germany, this set-up does erect formidable competitive barriers - barriers that look hard to break down.
I don’t see the structure of European banks changing quickly through consolidation. Beyond structural factors, of course, the thorny and seemingly intractable issue of NPL recognition also remains on the table. Even if there were appetite for mergers, banks are wary of taking the plunge just in case they find disaster lurking in the back books.
As a senior figure at a large European bank told me the other day, putting two wet dogs together doesn’t make a dry dog. Europe’s bankers need to be careful not to change Europe’s banking construct just to suit the policy agenda while ignoring the business agenda and in the process creating the equivalent of large zombie banks.
Which brings us back full circle to the only game in town for merger speculation: the Mustier-Oudéa, Cryan-Zielke gossip circuses. Long may they continue.