M&A is the most radical of a chief executive’s choices. A strategic control graph – with bigger and higher-valued institutions to the top and right and smaller and cheaper institutions to the bottom left – shows the eurozone’s most likely deals.
I last plotted a graph like this in 2015. A lot has happened since, so it is worth seeing how market gyrations have moved positions. It shows which big banks could get bigger and which could disappear.
Assessing the block’s top 20 biggest listed banks by tangible equity, stock market outperformance over the last three years suggests Santander, BBVA and Crédit Agricole SA (CASA) are all more likely acquirers than before – BBVA and CASA, at least, of possible targets further to the bottom left.
If one adds the equity of Crédit Agricole’s unlisted regional banks, it could do bigger deals.
Partly because of their rise, BNP Paribas, Intesa Sanpaolo and Société Générale all now look relatively less likely to acquire than before. Of these, SocGen seems a particularly unlikely consolidator today, after a period of marked share price underperformance. While other banks have settled legal issues earlier, US investigations are still pending on SocGen’s role in Libor manipulation, bribery in Libya and sanctions breaching.
Perhaps SocGen will rebound after the resignation of deputy chief executive Didier Valet in March. The bank’s exceedingly vague communication encourages such an optimistic interpretation: that Valet was a sacrificial offering to allow a settlement on Libor and Libya. However, as he was increasingly seen as chief executive-in-waiting, one wonders if there might also have been tension with long-standing incumbent Frédéric Oudéa.
The departure could hurt the bank’s close-knit culture, where executive loyalty is one of its biggest assets.
Still under threat are Commerzbank, Banco Sabadell and Italy’s Banco BPM (despite the merger that created it two years ago). ING still looks like a possible consolidator.
Let’s assume the acquirers will prioritize countries where they have good, sizeable businesses that are nevertheless overshadowed by the biggest local players. By that logic, let’s discount, for now, Santander’s long-debated entry to Germany and Italy.
On this basis, as things stand, the most likely big acquisitions over the next few years are of Bankia, or possibly Sabadell, by BBVA; Banco BPM by CASA; and Commerzbank by ING.
I am most confident of the first two. That is partly because ING shows greater commitment to dividends and digitalization than its peers and partly because consolidation has already started in Italy and Spain but not Germany. Recent M&A by rivals is more of a threat to CASA in Italy and BBVA in Spain than to ING in Germany.
However, note that two of these targets are government-owned: the Spanish state owns a majority stake in Bankia, while the German federal government is Commerzbank’s biggest shareholder, with 15%.
The state’s desire to sell down – and arguably an inherent lack of confidence and strategic vision at bailed-out banks – puts their long-term standalone existence in greater doubt.
This might also apply to ABN Amro, which is still majority state-owned, although Dutch banking’s good profitability gives it valuation protection for now.
The problem is that buying a government-owned bank comes with complications. Public anger at executive pay, for example, is a bigger issue and gets directed at politicians, who may seek to claim governance.
Share swaps become less appealing. Spain has a formal pay cap on bailed-out banks, while ABN Amro suffers similar constraints because of general Dutch anger towards banks. ING’s chief executive Ralph Hamers suffered an embarrassing climb down on a pay increase in March because of this. That atmosphere must further sap his M&A daring.
For Bankia and ABN Amro, privatization will probably precede takeovers. Meanwhile, in Italy, banks must still clean up their balance sheets to make themselves more appetizing. This is also true of Sabadell, although technology headaches in its integration of TSB are another reason why Sabadell is still a cake in the making.
If these buyers wait too long, however, they will have to pay more and other consolidators will likely emerge. UniCredit, for example, might in future be better able to absorb Commerzbank.