German Fail Points To More EU Bank Consolidation

A new round of banking consolidation in Europe?

The failed attempt to forge a German “national champion” in financial services through the merger of Deutsche Bank and Commerzbank has unleashed speculation about further consolidation in European banking.

Both Milan-based UniCredit and leading Netherlands lender ING reportedly expressed interest in acquiring Commerzbank—though whether their intentions were serious, as opposed to a spoiling tactic meant to frustrate a union of Germany’s two largest banks, remains to be seen. Other major players waiting in the wings include Spain’s Santander, and France’s BNP Paribas and Societe Generale.

Further consolidation of major eurozone banks is viewed as necessary to compete against big American banks—particularly in investment banking, where European players lost market share and failed to generate adequate returns in recent years.

At the height of Commerzbank’s merger talks with its larger German rival, CEO Martin Zielke declared in an internal memo that “the alternative of doing nothing is not an option.” Commerzbank has returned to its strategy of standalone development: “It was before, and it is now,” says the bank’s finance chief, Stephan Engels, adding, “I can’t say if it will always be.”

UniCredit CEO Jean Pierre Mustier recently sought to dampen expectations of an imminent bid for Commerzbank. “Mergers in Europe will be very difficult to put together,” he says, citing the many hurdles banks need to overcome. “Costs need to be controlled, capital needs to be matched, execution risks and governance need to be appropriate.”

A key factor in Deutsche Bank and Commerzbank’s decision to abandon merger plans was the need to raise huge amounts of new capital from already disgruntled investors. The call for a loosening of capital requirements imposed on EU subsidiaries of pan-European banks was recently voiced by the governor of France’s central bank, François Villeroy de Galhau, specifically to facilitate what many see as a long overdue consolidation the continent’s banking sector.