BMO’s acquisition of Bank of the West from BNP Paribas marks the latest chapter in bank M&A across North America. In Europe, however, even domestic bank deals have slowed after a flurry of mid-tier deals in 2020.
And BNPP has made it clear that the $16.3 billion in cash it will receive from selling Bank of the West won’t go towards buying traditional peers in its home continent – despite the fact that the lack of a strategic rationale for owning a retail bank in the US rather than Europe is behind the move in the first place.
BNPP is the European Union’s biggest bank by assets and market capitalization, so it should be a natural leader of the sort of big cross-border EU bank mergers that could give rise to more of a continental banking sector in Europe. Market participants have often wondered whether it could buy Germany’s long-troubled Commerzbank, for example.
Buying an incumbent would now just be a distraction
Clearly, a Commerzbank deal is not on the cards. Neither does the Bank of the West sale translate into European bank consolidation in general – whether domestic or cross-border.
Paris-based BNPP has already said that it will neutralize the earnings dilution resulting from this sale in an extraordinary capital distribution, namely a €4 billion share buy-back programme. Net of these buy backs, it is modelling an increase in its CET1 ratio of about 110 basis points. It plans to use the remaining €7 billion on gradually accelerating organic growth, especially in Europe, by investing in technology and innovation, and lastly by doing bolt-on acquisitions.
This bolt-on approach is not new. The bank has spent the past decade doing such deals, for example, its 2017 acquisition of low-cost French account provider Nickel.
True, BNPP has also spent the past decade cutting costs and risk. The infusion of capital from Bank of the West could have been precisely the time to be bolder in M&A, perhaps by buying a large retail network elsewhere in Europe. The bank’s share price has already risen by a third during the past year, boosting its M&A currency, at a time when some aspects of regulation are more accommodating of M&A.
But the environment for big bank M&A in the region has changed fundamentally, thanks to interest rates and, above all, technology. The persistence of negative rates means it is less attractive to buy balance sheet-heavy banks, rather than fee-focused businesses, such as wealth managers. And, most importantly, the growth in importance of financial technology and digital challengers means branches can be more of a burden than a benefit.
Buying an incumbent would now just be a distraction for BNPP from its most important job in retail, as it sees it. It would mean more time taken up negotiating with regulators and workers on how to get rid of redundant branches, not to mention all the unknown asset risks that come with buying another bank – rather than concentrating on boosting digital capabilities. These are all things CEO Jean-Laurent Bonnafé would rather avoid.
Walking away
A similar set of considerations went into BBVA’s decision to walk away from merger talks with Banco Sabadell a year ago, after selling BBVA USA. They were also an important part of UniCredit’s decision to terminate talks this year over an acquisition of Banca Monte dei Paschi di Siena, despite the offer of support from the Italian government.
One financial institutions banker points to NatWest’s recent €6.4 billion sale of Ulster Bank’s loan book, branches and asset finance business to Permanent TSB, as showing that, in this environment, once a bank has sufficiently increased capital returns to shareholders after a sale, there is not much money left for M&A. “It’s not going to go down very well if you go on a shopping spree, spending excess cash, when investors have been waiting many years for it,” he says.
In other words, M&A – even of the bolt-on variety – is last on the list of priorities after cost cuts and capital returns.
