On the pc in his spartan corner office looking over London’ s Canary Wharf, Steve McFarlane keeps a live spreadsheet that charts the market values from the world’ s biggest banks. Quickly, the chairman can quickly check the family member size of potential merger applicants.
Known as “ Mack the Knife” for their habit of firing chief professionals, Mr McFarlane and other Barclays older directors have recently been plotting an alternative type of upheaval at the bank — running the rule over the with , its emerging markets-focused competitor.
“ I do think offers will happen, particularly in the European country, ” Mr McFarlane says. “ Politicians in Europe need it to happen. Bankers are generally less enthusiastic. A lot of European banks look susceptible. I think it’ s possible that will US banks will look to do offers in Europe. ”
The Barclays chairman is just not alone. The between banks has returned, a decade after the last round associated with grand-scale dealmaking left shareholders medical painful losses, as epitomised by ’ s crippling takeover of ABN Amro on the eve from the financial crisis in 2008.
Jean-Pierre Mustier, chief executive of Italy’ s , summed up the sector’ s increasing obsession with scale, or insufficient it, when he pointed out lately that the $350bn market value of in america was four times that of Spain’ s , the eurozone’ s greatest lender.
“ You will find only two pan-European banks within Europe: , present in France, Italia and Benelux; and UniCredit, contained in Italy, Germany and Austria . . . So we have a problem, ” says Mr Mustier. “ All of us don’ t have the right banking institutions. So we need to have more pan-European banking institutions, bigger banks . . . to support the economy. ”
The Financial Times provides spoken to dozens of senior lenders, regulators, investors and advisers to discover why the sector is so excited about the prospect of a big deal within European banking.
Possible deal Barclays/Standard Chartered
Overall employees 165, nine hundred
2017 internet loss $1. 3bn
Assets $2. 16tn
Pros Contrasting geographic fit
Cons Lack of cost benefits
Based on the mixed totals for the two banks. All of figures are to the end associated with 2017
Few believe any kind of deal is imminent, given the particular distractions of , unfinished restructuring initiatives at a large number of the region’ h biggest lenders and the eurozone’ ersus continued failure to create a single marketplace for banking. But over the following 12-to-18 months many financiers are usually expecting a large-scale deal.
Not everything below discussion is realistic. Some of the clever investment banking presentations being sent to the boards of the biggest Euro lenders about the benefits of consolidation are already so brazen that even a few veteran dealmakers are themselves moving their eyes.
“ The talk has walked up. But I don’ big t feel particularly sensible going into many bank boardrooms pitching some of the cross-border mergers that are being bandied around, ” says a senior London-based purchase banker. He cites the idea of a good Anglo-Spanish merger between Barclays plus Santander as one of the “ craziest” suggestions pitched so far.
Possible deal Socié té Gé né rale/UniCredit
Total employees 238, 900
2017 net profit $9. 7bn
Assets $2. 47tn
Pros Synergies in corporate plus investment banking
Cons Political level of resistance
Based on the mixed totals for the two banks. Many figures are to the end associated with 2017
The idea of a significant European banking merger very first surfaced after Sweden’ s recently had an offer to buy rival ABN Amro by the Dutch government, the bank’ s majority shareholder, two years back. Some financiers now view UniCredit as one of the favourites to do an offer, with Mr how to revive the idea of merging the Italian loan provider with its French rival Socié té Gé né rale.
Investment bankers also think the tie-up between and is likely within the next couple of years in a bid to, whilst other takeover targets include the part-nationalised banks: in Spain, and ABN Amro. BNP Paribas and Santander — the eurozone’ t two biggest lenders — are usually widely seen as probable consolidators.
“ In the mass-market company, size really matters and they are searching for more scale on their platforms, for this reason discussions are becoming more intense, ” says Bernhard Hodler, the chief professional of Swiss private bank . “ Consolidation will continue. ”
For years, has been buoyant in pharmaceutical, technology and customer industries. But the banking sector continues to be devoid of large takeovers since the 2008 crisis. Last year there were $79. 6bn of mergers between banks globally, a fraction of the $359bn of this kind of deals in 2008, according to Thomson Reuters.
Achievable deal Deutsche Bank/Commerzbank
Total employees 146, 952
2017 net loss € 673m
Assets $2. 15tn
Benefits Cost-cutting and reduce Deutsche’ s exposure to investment bank
Cons Two weak banks do not create a strong one
Based on the combined totals for the 2 banks. All figures are towards the end of 2017
One particular trigger for the revived interest in dealmaking is the realisation among European brokers that they are being squeezed by more efficient rivals in their two main marketplaces. , having recovered faster in the crisis than their European alternatives, are gobbling up market share within corporate and investment banking. Simultaneously, the encroachment of big technologies groups such as and directly into consumer financial services to steal financial institution customers and squeeze profit margins.
“ European banks are saying: ‘ We have ceded the particular sunny uplands of capital marketplaces to US banks, even in our own home markets, and now we encounter the threat of losing the particular retail banking market to ALL OF US big tech, ’ ” states Ronit Ghose, global head associated with banks research at Citigroup. “ That is a real existential threat. ”
A natural defensive reaction, some bankers argue, is to develop bigger via acquisition, permitting lenders to spread over a bigger revenue base the spiralling price of and complying with myriad rules.
“ The real bothersome threat is coming from large tech, where the really attractive revenue pools like foreign exchange or obligations are just a means to an end for some from the big fintech [companies], ” says Francesca McDonagh, leader of Bank of Ireland. “ There is a likelihood of more consolidation, especially in the squeezed middle. ”
Possible deal Nordea/ABN Amro
Total workers 50, 353
2017 net revenue $6. 8bn
Assets $1. 14tn
Pros Exit path for Dutch state from ABN
Cons Political sensitivity
Based on the combined totals for that two banks. All figures are usually to the end of 2017
Europe’ s banking industry remains highly fragmented . There is certainly one bank for about every fifty, 000 citizens in the eurozone, an identical level to the US, but much more diffuse than the UK’ s 1 per 170, 000 people plus Japan’ s almost one for each 900, 000 people, according to Western european Banking Federation figures.
“ A whole set of [European] national champions is now performing and thinking about what it is like to end up being champions in more of a region-wide framework, ” says Gary Howe, mind of financial institutions in North America in Lazard.
Vulnerable profitability creates more pressure in order to consider radical options. The average come back on equity for European banking institutions remains below 8 per cent — lagging behind both their ten per cent cost of capital and a lot more profitable US rivals. “ The particular management think [dealmaking] might enhance their position: they think they need to do something or they are going to get terminated, ” says Bertrand Lavayssiè lso are, a partner at consultants ZEB.
Regulators too are becoming more vocal in phoning for cross-border bank mergers, that they say would boost the sector’ h profitability and support the economic climate by providing a stronger source of financing for companies.
European Main Bank officials believe that creating a couple of pan-European champions would reduce the reliability on Wall Street banks, that are still perceived to have deserted European countries in the crisis — something United states bankers hotly deny. Daniè le Nouy, chair of the ECB’ s supervisory board, stated in : “ In my opinion, cross-border mergers within the euro area are the method forward. ”
As the ECB would not reduce capital specifications for merged entities, officials suggest it could use its powers to assist in other ways. These may include enabling banks to offset more of their own biggest exposures to individual customers across borders or increasing their own flexibility to move capital and liquidity between countries.
This particular renewed interest in mergers, however , comes more from a position associated with weakness than strength. Many of the banking institutions thinking hardest about dealmaking possess shares priced far below the particular book value of their assets. Barclays is responding to pressure from a good; Deutsche Bank has made and its gives recently hit all-time lows; UniCredit suffers from hefty non-performing loans as well as a bloated cost base.
“ I wouldn’ to be sure if the [banks] are waving or drowning, ” says Lindsey Naylor, a financial consultant at Oliver Wyman. “ They have been trying to take costs to 10 years without much success and nowadays there are a growing number of players looking to move into the very center of their market. ”
Barclays leader John McFarlane and other senior company directors have been eyeing a possible merger along with Standard Chartered © Bloomberg
For all the talk about bank M& A , many believe investment decision you won’t happen for several years, if at all. “ You will get lots of flirting, but very little sexual intercourse, ” says Davide Serra on the hedge fund Algebris, which has investments in several of Europe’ s greatest banks. “ For the next 2 to 3 years, I think each of them needs to experience their own digitisation process. ”
Most deals this year are actually between mid-sized domestic lenders, for example of Saudi British Bank plus Alawwal Bank to create the kingdom’ s third-largest lender, or in america between Fifth Third Bancorp associated with Cincinnati and Chicago’ s MEGABYTES Financial. Virgin Money final month agreed to by rival CYBG to create the UK’ s sixth-largest bank.
The case to get big cross-border banking deals is usually weakened by the poor results of past deals. An Oliver Wyman analysis found that fewer than half cross-border bank deals in the 10 years to 2016 achieved positive internet synergies.
Sé verin Cabannes, SocGen deputy leader, says: “ If you have structural worth destruction, it’ s not stable . . . so the cross-border merger could come one day, when [that] we should find further domestic consolidation in certain Europe. ”
How did the particular 2008 financial crisis affect you?
Another to consolidation is the unfinished nature of eurozone banking union. The bloc offers harmonised some bank rules, several areas remain fragmented including taxes, bankruptcy law and rules upon treatment of collateral. Senior bankers state pan-European combinations only make sense when they can move capital and liquidity more freely across the bloc — something that is unlikely until policymakers agree a common eurozone deposit insurance policy scheme.
The particular election of an Eurosceptic government within Italy may make these negotiations more difficult, especially with widespread scepticism within Germany that the scheme is a very finely disguised bailout of southern Europe’ s weak banking systems.
On top of this, any bank thinking of a big merger needs to weigh the price of moving up the scale of systemic importance, which brings with it additional capital requirements from the Financial Balance Board, an arm of the G20. They also need to consider the complexity within combining two IT systems.
In spite of these types of hurdles, many bankers believe loan consolidation is inevitable.
, the former JPMorgan executive introduced three years ago to run Standard Chartered — a perennial subject associated with takeover speculation, has little question that there will be “ many, several, many fewer banks” that can adjust to the new environment. “ We will have got massive consolidation along the way, ” he or she adds. The question will be who will move first and which usually banks will be left standing once the dust settles.
ALL OF US deals Medium-sized banks see for you to grow
A decade ago Gary Parr was in the particular thick of things advising at the sale of Bear Stearns to JPMorgan Chase and Lehman’ s ALL OF US business to Barclays, among some other crisis-era combinations.
Yet he, and other veteran agents, do not envisage a return to such big-bank mergers and acquisitions in america even as counterparts in Europe think about radical moves. For one thing, notes David Esposito, co-head of financial institutions on Morgan Stanley, some of the biggest banking institutions already have more than 10 per cent associated with deposits nationwide, meaning they are avoided by a 1994 law from purchasing any more. Regulators remain cautious about backing any deal that might create a big bank more complex and more difficult to manage.
However , 1 level down — amongst regional banks and the so-called super-regionals — there could be some exercise.
Congress last month lifted the threshold for a financial institution to be considered a, and thus susceptible to extra layers of regulation. Which means mid-sized banks can now grow a great deal bigger — amassing up to $250bn in assets — without dread of higher expenses. Eric Bischof, co-head of the global financial institutions team at Bank of America, states there have been several recent deals within the $1bn-$5bn market capitalisation range and wants more to come, perhaps worth just as much as $20bn.
Foreign banking institutions, too, could seize the opportunity to broaden. Sumitomo Mitsui Banking Company, Japan’ s number two loan provider by assets, has long been linked to the US deal, while wants to turn into a top 10 bank by deposits in the us. Canadian banks also remain willing to diversify. Bill McLannahan