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On the other hand, Commerzbank – a German institution – could be the eurozone’s biggest takeover target in terms of its valuation and size relative to other listed firms. Santander is the most likely buyer – but FIG bankers barely mention Germany when discussing the banks that will drive consolidation in Europe.
In a ranking of western European banks by price-to-book value, not one German bank even makes the top 20. Only the Greek banks are valued lower than Commerzbank – though Deutsche Bank is not much better. Particularly after the flop of its strategic review last month, UniCredit could end up in a similar position to Commerzbank, but that is not just down to Italy. HVB, one of the biggest German banks, is one of UniCredit’s least efficient subsidiaries.
Foreign banks have sought to grow market share among Mittelstands partly because of Germany’s slightly better growth compared to other big eurozone markets. But this is attractive for fee-generating business, like cash management, not loans. As a rule, banking German retail clients and medium-sized corporates is unappealing, as competition from public sector banks – which are under less pressure to maximise profits – squeezes margins.
Unlike some of the savings banks and mutuals in Spain and Italy, none of the German Landesbanken have been listed. It is therefore unfair to single out Commerzbank, or indeed Deutsche Bank and HVB – rather than the Landesbanken – as the embodiment of weak profitability in German banking.
Private banks have struggled to keep down costs in German retail and commercial banking, but Commerzbank has taken convincing steps to refocus its business and improve profitability. Chief executive Martin Blessing did not look like he was being forced out last month, when he announced – just before revealing above-consensus results – he would leave late next year. Deutsche Bank is selling Postbank. HVB has closed around half its branches since 2008, and UniCredit plans even deeper cost cuts in Germany.
Given the outlook for interest rates, margins may only get worse in Germany. A survey in September by the regulator showed small and medium-sized German bank on average expect pretax profit to fall by a quarter by 2019 though it could fall by a half or even three quarters – despite cost-cutting plans and hopes for better economic growth. None of the main Landesbanken managed to achieve a return on equity above 8% in the first half of 2015, according to figures compiled by SNL; the ROE of the biggest (LBBW) was below 3%.
Up to now, German public banks have resisted reform, perhaps partly because the sovereign crisis hit southern Europe hardest. But Germany’s economic model has lost its glow in the Volkswagen scandal. Perhaps now federal and EU officials may have more luck restructuring the banks too.
The banks themselves might be advised to swallow their pride, and merge – before they suffer the even greater indignity of HSH Nordbank, which has to be privatised within two years as a condition of an EU restructuring deal in October.
Meanwhile the UK looks like a much more fluid market. The bigger UK banks are distracted by the onslaught of new regulations, particularly around investment banking – an argument that David Duffy, Clydesdale’s chief executive, likes to make. As the biggest of the challengers by revenues and assets, he thinks his bank has the best chance of shaking up British banking.
Duffy’s reputation, especially in digital, is helping sell the story that he can replicate his success making Allied Irish Bank the most advanced of the big Irish lenders in digital banking.
However, the Clydesdale job could be even harder than the one he faced four years ago. Duffy says Clydesdale won’t repeat the mistakes of the past by rushing into riskier businesses it knows less well. It is tightening up its risk management systems. But analysts say increased competition from challenger banks is already contributing to decreasing average UK mortgage spreads.
For some challenger banks, a merger might make for a good exit, while share prices are high and business models improved, and hopefully before a dip in house prices. One of most frequently cited possible tie-ups, in fact, is between Clydesdale and TSB, which Spain’s Banco Sabadell bought this year.
Duffy says he is open to the idea of a takeover. But even joined up, Clydesdale and TSB would be only half the size of the smallest of the big six.