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European finance: The pros and cons of bank consolidation

Europe remains chronically overbanked, and its banks are resolutely underperforming. Surely the answer lies in M&A? But with regulatory uncertainties still distracting boards and chief executives, the low-hanging fruit of European finance is likely to remain unpicked for now.


Banco Sabadell’s announcement in March that it is to purchase UK bank TSB was a rare example of something that the European banking sector desperately wants to see: large-scale, cross-border M&A. 

The £1.7 billion acquisition of TSB, which was previously spun out of Lloyds Banking Group, has plenty of critics and faces big hurdles, not least from the cost of migrating TSB onto Sabadell’s IT platform. But the very fact that it is happening at all only highlights how long it is taking for Europe’s severely over-banked financial sector to see any glimmer of merger activity.

“There is a case for potential consolidation in Europe, both domestic and cross-border,” reckons Javier Oficialdegui, co-head of FIG EMEA at UBS in London. “The banking sector as a whole is not yet creating value for shareholders: average ROE at the largest 30 banks in Europe is still below their cost of equity. Banks will struggle to get to 10% or 11% ROE in aggregate until 2016 or 2017, and cost management will be key to achieve these levels in a capital-demanding environment with sluggish growth and low interest rates,” he tells Euromoney. 

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