UniCredit and Commerzbank have been on the cusp of merger talks this 12 months earlier than the Ukraine warfare scotched a deal that would have kickstarted European banking’s long-awaited cross-border consolidation wave.
Three folks with direct data of the matter instructed the Monetary Occasions that in early 2022 UniCredit’s chief govt Andrea Orcel deliberate casual discussions a few potential mixture of the Italian lender’s German HypoVereinsbank subsidiary along with his reverse quantity at Commerzbank, Manfred Knof.
The transaction would have shaped Germany’s second largest lender with €785bn in property, 1,000 branches and 48,000 workers.
Analysts have lengthy seen a tie-up between UniCredit and Commerzbank as one of the crucial enticing combos in European banking as there may be comparatively little regional overlap between the lenders’ German operations.
HypoVereinsbank, which Milan-based UniCredit acquired in 2005 and is extra worthwhile than its German peer, has a robust native footprint in Bavaria and the Hamburg space, whereas Commerzbank is current throughout Germany.
The deal, which UniCredit beforehand explored in 2019 as a substitute for Commerzbank’s subsequently-aborted tie-up with Deutsche Financial institution, would have been the primary huge cross-border deal in Europe’s fragmented banking sector.
Orcel organized a gathering in early 2022 in Germany to debate the merger with Knof, in line with folks with data of the discussions. However earlier than particulars may very well be thrashed out by the CEOs, Moscow had invaded Ukraine.
UniCredit as an alternative determined it wanted to handle its publicity to Russia earlier than embarking on any massive dealmaking. UniCredit is one among a handful of western banks with massive operations in Russia.
Orcel has mentioned the group is contemplating exiting the nation and has revealed it stands to lose €5.3bn on the enterprise in a worst case situation. It has already begun swapping credit score portfolios with native lenders.
The prospect of upper rates of interest had buoyed European lenders’ shares till the warfare began, with Commerzbank disclosing every week earlier than the invasion that greater rates of interest in Europe would ship a billion-euro windfall to its backside line by 2024.
However issues over the financial fallout of the warfare, and potential disruptions of Russian power provides, have despatched share costs downwards since late February — UniCredit has misplaced greater than a 3rd and Commerzbank fell by 26 p.c.
US buyers like Capital Group pulled out of European banks over the previous three months, promoting massive stakes in Commerzbank, Deutsche Financial institution and Barclays. The US fund supervisor was UniCredit’s largest shareholder, however final week lower its stake from 6.8 per cent to beneath 4 per cent.
The fragmented nature of Europe’s banking market has been thought of a handicap for its lenders, which have misplaced floor to US rivals on profitability and market share.
EU regulators and policymakers have urged banks to think about combining to enhance economies of scale – however no massive cross-border offers have taken place with banks complaining that EU capital necessities and differing regulatory regimes make mergers too punishing.
A tie-up between the 2 banks remains to be thought of the almost definitely massive deal, partially as a result of Commerzbank has the German state as a 15 per cent shareholder after a €23bn bailout in 2008 and 2009, and is seen by analysts as sub-scale.
After a shareholder rise up that adopted years of failures to chop Commerzbank’s bloated value base, Knof was parachuted in January final 12 months as a part of a last-ditch effort to revive profitability. Within the first quarter of 2022, the financial institution’s internet revenue greater than doubled to €298mn, following a better-than-expected efficiency in 2021.
UniCredit initially approached German officers a few tie-up with Commerzbank in 2017 and ready a bid three years in the past, in line with folks with data of the strikes.
Underneath the unique plans, UniCredit would have amassed a sizeable stake in Commerzbank and merged it with HypoVereinsbank.The mixed entity would have been primarily based in Germany whereas UniCredit would keep its headquarters and itemizing in Milan. Commerzbank would retain a free float of shares listed on the Frankfurt inventory alternate.
Commerzbank’s market capitalisation has since shrunk from €9bn on the time to €7.8bn, whereas UniCredit’s inventory market worth is €21bn, down a 3rd from three years in the past.
UniCredit and Commerzbank declined to remark.
