Europe’s Banks Are Finally Merging. Just Not as You Think

A year after a series of hostile takeover approaches fueled speculation of a long-overdue consolidation in European banking, the reality is shaping up to be far more complicated than the cross-border mega-mergers dreamed up by executives and technocrats in Brussels.

Almost all of the headline-grabbing proposals of the past year have failed or are stalled. UniCredit SpA’s interest in Commerzbank AG has run into opposition from Berlin, and its offer for Banco BPM SpA was pulled after Rome imposed conditions. BBVA SA managed to move beyond government objections, but its €16.3 billion ($19 billion) bid for Banco Sabadell SA turned out to be too low for the rival’s loyal investors.

Other, sometimes unexpected deals are getting done, especially where the government is supportive, as in the case of Banca Monte dei Paschi di Siena SpA’s takeover of Mediobanca SpA. A plan by the Dutch government to further cut its stake in ABN Amro Bank NV is fueling speculation about a deal for that firm. KBC Group NV is said to have evaluated options, which could revive interest from BNP Paribas SA and Deutsche Bank AG.

Spain: Growing at Home and Abroad

The current takeover wave was kicked off early last year, when BBVA unveiled its bid for Sabadell. Banco Bilbao Vizcaya Argentaria SA, as the lender is formally known, was trying to balance out its exposure to emerging markets. But like the other deals that have since failed, it lacked the backing of the target and of the national government.

Its hostile approach, however, spawned at least one other deal. Sabadell ostensibly sought to prevent a takeover by agreeing in July to sell its UK unit TSB to Banco Santander SA, the largest bank headquartered in Spain and BBVA’s main rival. Santander in turn is in the process of reorganizing its international presence with the sale of most of its business in Poland.

CaixaBank SA, which has the highest Spanish banking assets, sought to grow in Portugal, but lost out in the pursuit of Novo Banco SA. The prospect of a Spanish buyer for the remains of what was once Portugal’s largest bank by market value briefly revived fears in the country that the larger neighbor was taking control of its financial industry.

Italy: Hostile Offers and Kingmaker Shareholders

Even more so than Spain, Italy has been a hotbed of proposed transactions, much of it driven by UniCredit, the firm led by longtime dealmaker Andrea Orcel. His hostile bid last year for Banco BPM – amid speculation that the government was planning to build a new large banking group around that firm to rival UniCredit – kicked off a flurry of other, sometimes competing proposals. Only last month, Monte Paschi secured a majority in Mediobanca, a deal worth more than €17 billion that was unthinkable not long ago.

The drama is heightened by the presence of kingmaker shareholders, including the heirs to the late billionaire Leonardo Del Vecchio and construction tycoon Francesco Gaetano Caltagirone. Having accumulated large stakes in the main companies involved in the current dealwave, they have backed Monte Paschi’s takeover and challenged Mediobanca’s independence. The moves allowed them to tighten their grip on the country’s biggest insurer, Assicurazioni Generali SpA, and cast doubt over a planned joint venture between Generali and French lender BPCE SA in asset management.

While UniCredit ultimately dropped its Banco BPM approach because of onerous conditions imposed by the government, it’s “dominating a lot of the activity and clearly taking a very proactive approach” in Italy and abroad, said Elisabeth Rudman, an analyst at Morningstar DBRS.

UniCredit had more success in Greece with the purchase of a holding in Alpha Bank SA presaging a merger of the two firms’ Romanian units. Greece has been at the forefront of governments exiting bailed-out lenders and has welcomed UniCredit’s interest. Germany, meanwhile, continues to push back against Orcel’s pursuit of Commerzbank and halted further divestments of its stake in the lender. Orcel has said he may take until 2027 to decide whether to make an all-out offer.

Germany: Domestic Giants Get Squeezed

For now, the idea of losing Commerzbank as a national champion is anathema to the German government, which bailed out the lender in the wake of the financial crisis. Commerzbank and larger rival Deutsche Bank made some smaller acquisitions after calling off merger talks of their own more than six years ago. Deutsche Bank’s purchase of Numis Corp., agreed in 2023, marked its biggest deal in recent years.

Bettina Orlopp, Commerzbank’s chief executive officer, says her firm is performing well on its own and that a takeover would lead to revenue attrition given client overlap with UniCredit. She and Christian Sewing, her counterpart at Deutsche Bank, argue they’re well-positioned to grow, in part because of the government’s plans to boost spending on infrastructure and defense.

But both lenders are squeezed on all fronts of their home market. Competition from the mass of small cooperative lenders and savings banks weighs on profit in the retail business and new entrants like JPMorgan Chase & Co. are set to add to that pressure. International peers such as BNP Paribas are also looking to pick up business with corporations and wealthy clients.

France: Pursuing Bolt-On Deals

French banks have had mixed fortunes of late, in part because local regulations meant they didn’t benefit as much as their rivals from the surge in interest rates three years ago. Societe Generale SA has been selling off a series of smaller units to shore up its capital levels, though it has signaled that phase is over.

BNP Paribas is using proceeds from the well-timed sale of a US unit to buy businesses it calls “adjacent” to banking. That includes the investment arm of insurer AXA SA to build a champion in asset management, a business whose fees offer a degree of independence from the ups and downs of interest rates.

Other banks are more focused on deals abroad. BPCE was keenly received as a buyer of Portugal’s Novo Banco, a purchase agreed in June. Credit Agricole SA expanded its stake in Italy’s Banco BPM to strengthen its bargaining position in the deal wave shaking up Italian finance. It recently tapped advisers to explore options for its roughly 20% holding, including a potential merger of Banco BPM and its own Italian operations, people familiar with the matter have said.

UK: Big Banks Fight Back

A decade after UK regulators made it easier for startups to challenge the country’s biggest banks, the incumbents are striking back. In a deal that created the second-largest provider of mortgages and savings accounts in the UK, Nationwide Building Society last year bought Virgin Money UK Plc.

Other building societies have also pursued deals while commercial lenders like HSBC Holdings Plc and Lloyds Banking Group Plc are burnishing their tech credentials with the purchase of Silicon Valley Bank’s UK unit and other possible transactions.

NatWest Group Plc and Barclays Plc picked up banking operations of two supermarket chains. Yet executives including NatWest chief Paul Thwaite and Barclays Finance Director Anna Cross say their firms have a high bar. Deals must not become a distraction and need to respect a “very strict capital hierarchy,” Cross said recently.

On the continent, the current dealwave is underpinned by the prospect of further European integration and the need to create lenders big enough to compete with Wall Street. Yet with the bloc’s project for a single banking market still incomplete, most takeovers for now are either domestic in nature or happening in a foreign market where the acquirer is already present.

“Several management teams have recognized that simply waiting for the status quo to change is not the right answer to ensure their banks will be competitive in the future,” said Tom Ackermans, a fund manager at Fidelity International. “Hostile takeovers clearly bring more execution risk, but simply waiting and not acting on certain ‘logical’ transactions might ultimately be a bigger risk.”