Global Economics

Europe's Banks: Is the M&A Game Finally Afoot?


Will the great banking mergers finally start in Europe? That's been the speculation in financial circles since the late-August announcement of the $38 billion merger of Italy's Sanpaolo IMI (IMI) and Banca Intesa. Industry executives have said for years that Europe's over-banked markets badly needed a final round of mega-deals to create a viable business. But political factors have long prevented the pace of mergers from accelerating.

This time, though, the game may get serious. Start with Italy. In the wake of the Sanpaolo-Intesa deal, smaller rivals in Italy's notoriously fractured bank market will be scrambling to bulk up to compete with a group laying claim to a fifth of the country's retail banking. What's more, the major foreign shareholders in Sanpaolo and Intesa—Spain's Santander (STD) and France's Crédit Agricole—will be awash with cash from the sale of their stakes and will likely start shopping around Italy and the rest of the Continent for new banks in which to invest.

Any bank that wants to keep pace will have to take out its wallet as well. The merger "will be a real catalyst that should kick-start the consolidation wave," said Kamran Butt, head of the European Research Division at Louis Capital Markets in London. "[Domestic and cross-border] acquirers don't want to lose out, so now they will be trying to second guess each other."

STAYING IN-COUNTRY. A few European players, such as Britain's HBOS, have already bulked up considerably through acquisitions. Mid-market players will want to follow suit, especially since margins have been shrinking in the industry.

In-country mergers make more sense. They give the opportunity to increase earnings while decreasing the cost base and branch overlap in a familiar cultural environment. The synergies derived from domestic acquisitions generally generate a return on investment of 10%, compared with an average return on investment of 8.7% from cross-border marriages, according to a report by Keefe, Bruyette & Woods.

The trouble is, outside Italy there's little opportunity for domestic hook-ups. Attempts in Britain and France would be blocked for regulatory reasons because those markets are already controlled by several main players. Spain has a network of loosely affiliated mutuals that control about half of the market. The German network of regional banks isn't accountable to shareholders, so they don't face pressure to merge.

DOWN TO A HANDFUL. Analysts figure these conditions will force the bigger banks to venture across borders to find merger partners. By the end of the decade, said Nick Sandall, head of retail banking at Deloitte, there will be only "a handful" of big players on the European retail banking scene.

Though nearly 19% of the region's banks ceased operations between 1999 and 2004, Deloitte figures 8% more are set to go through 2009. "They're all looking behind their backs and asking how they can survive," said Louis Capital's Kamran Butt. Midsize financial institutions with a market capitalization between $26 billion and $64 billion will be prime targets, he says.

NEXT STEPS. And speculation is coming thick and fast. Shares of Royal Bank of Scotland rose on Aug. 30 after a German financial newsletter said the Britain-based bank may be interested in Germany's Deutsche Postbank. Commerzbank is also a prime takeover candidate in Germany, analysts say. In Britain, meanwhile, banks that were at the forefront of M&A activity in the early part of this decade such as Lloyds TSB (LYG) and Barclays (BCS) now find they may be too small to survive.

Back in Italy, Santander, which has long harbored ambitions there, and Crédit Agricole, are both likely to start sniffing around as the Bank of Italy governor, Mario Draghi, encourages consolidation. Banca Popolare Italiana has considered merging with other Italian banks and reportedly will meet with advisers Aug. 31 to discuss the next step.


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