Against expectations, European banks are thriving
In 2020, when BBVA and Sabadell abandoned merger discussions, it was difficult to find investors with anything positive to say about European banks. A decade of near-zero interest rates, stiff regulation and anaemic economic growth had made them unprofitable and unattractive. The two Spanish lenders were no exception. BBVA had a market value of €26bn ($32bn), less than 40% of its 2007 peak. At €2bn, Sabadell was worth only a fifth of the accounting (“book”) value of its equity.
Their fortunes looked much brighter on May 6th when Sabadell rebuffed another approach from BBVA, which this time offered €12bn. Shares in Europe’s big banks have risen by a fifth this year, more than twice as much as the broader market (see chart 1). Lenders are less risky—capital ratios have risen, the proportion of bad loans on their balance-sheets has fallen—and much more profitable (see chart 2). Higher interest rates, which benefit banks by widening the spread between what they receive on assets (loans) and pay on liabilities (deposits), have lasted much longer than expected. For shareholders, the good news keeps coming. On May 7th UniCredit, Italy’s second-biggest bank, reported a quarterly profit of €2.6bn, up 24% year-on-year. Its shares have soared by 46% this year. The same day UBS, a Swiss bank, announced its return to profitability a year after swallowing Credit Suisse.
On May 9th BBVA launched a hostile offer for Sabadell on the same terms the bank had already rejected. Whatever the outcome, its actions are likely to inspire others. Vows heard across the English Channel have also raised expectations. In March Nationwide, a British bank, agreed to pay £2.9bn ($3.7bn) for Virgin Money, a rival. Enthusiasm among investors may encourage bank bosses to dust-off dealmaking plans. They will shed their doubts quickly, says Nicolas Véron, a financial-policy analyst. That was true last time European bank stocks were popular. In January 2004 Emilio Botín, then chairman of Santander, wrote in the Financial Times that he was “very sceptical” of large cross-border deals. By summer the Spanish bank had agreed to buy Abbey National, a British one, kick-starting a merger wave that reached its peak three years later when a pan-European troika, including Santander, bought ABN AMRO, a Dutch lender.
During and after the global financial crisis of 2007-09, Europe’s bankers struck deals with less fanfare as weaker players merged in home markets. Any dealmaking wave is now more likely to resemble this domestic consolidation than the cross-border takeovers pursued in the giddy pre-crisis era. “There has been a reappraisal of the economics of banking, and today dominating one market is much more attractive than being all over the place,” notes Huw van Steenis of Oliver Wyman, a consultancy. Others suggest that the sorts of people running Europe’s banks are simply too boring for cross-border takeovers. And when shares trade below their book value, buying them back is a high-return (and highly popular) way to spend healthy profits.
What might prompt more ambitious dealmaking? One catalyst could be progress on Europe’s half-finished banking union. Creating a pan-European lender makes less sense without a true banking single market. Moreover, the relationship between governments and their biggest domestic lenders is still too close for comfort. The absence of a shared deposit-insurance scheme, which would involve European authorities guaranteeing customers’ deposits, is an obstacle to a more integrated and competitive banking system. Joachim Nagel, president of Germany’s central bank, recently advocated a “hybrid” insurance model, which would leave national deposit schemes in place but have them supplemented at a European level. Yet even this compromise is unlikely to be implemented soon.
Deals among local rivals face obstacles, too. When interest rates rise, the value of a bank’s long-dated assets decline. These paper losses sting only when assets are sold in a panic, or when a bank is acquired, since accounting rules require the seller’s balance-sheet to be marked to market. When UBS bought Credit Suisse in June, it wrote down the value of its former rival’s book by $15bn. At the end of 2023, unrealised losses on financial assets came to over €5bn at Sabadell. But there has been progress in this regard: paper losses are less of a problem than they were a year ago. Analysts at Barclays, a bank, say that during 2023 losses at Italian banks declined from 10% of the institutions’ market value to 5%.
This has left plenty of banks looking ripe for deals. Of those tracked by the Stoxx 600 banks index, nearly two-thirds are currently worth less than their book value. Four in ten are expected to return less than 12% on equity this year, making them seem cheap and suggesting they might do better as part of a bigger institution. Sabadell is one such bank. Deutsche Bank and Commerzbank, two German lenders which have long been tipped for a tie-up, are others. One more, ABN AMRO, remains a ward of the state, with the Dutch government the largest shareholder. The Italian treasury’s gradual exit from Monte dei Paschi, its oldest bank, also makes it a subject of frequent takeover speculation.
A bid by, or for, any one of these banks could set off a rush of deals, since fear of missing out is a powerful motivator. Perhaps bids will even emerge from beyond Europe. If the continent’s bankers sit on their hands, foreign banks or private-equity funds may begin to circle. That would, at least, force Europe’s banking bosses to the negotiating table. ■
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