(News Bulletin 247) – Since Unicredit has made no secret of its desire to merge with Commerzbank, the market is once again questioning hypothetical trans-European mergers. But, for listed French banks, consolidation operations are almost impossible. Even at the national level.

This is the big news story in the banking sector at the start of the 2024 school year: the Italian bank Unicredit’s desire to merge with its German counterpart Commerzbank. The Italian bank acquired 9% of its rival last week. Unicredit’s management has made no secret of its ultimate desire to merge with Commerzbank. CEO Andrea Orcel once again praised the merits of such a union to Handelsblatt on Monday.

The move brought back to the surface the topic of cross-border banking consolidation, a long-standing issue and a potential catalyst for sector actions in Europe.

In May, the President of the Republic, Emmanuel Macron, had also fueled market speculation a little, by declaring to Bloomberg that he was not closed to the idea of ​​a takeover of a French bank by another European establishment.

Although he did not mention any names, the Société Générale share price, the bank with the lowest stock market value, rose following these remarks. The tenant of the Elysée Palace then clarified his thoughts, telling L’Express that he had neither to “wish” for nor to “block” a banking consolidation.

However, the announcements on Unicredit and Commzerbank did not benefit the shares of listed French banks, namely BNP Paribas, Crédit Agricole SA and Société Générale. The market did not carry out a cross-reading that would have led it to judge that this potential merger could signal other operations for the French institutions.

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BNP and Société Générale bosses do not believe in cross-border mergers

Several factors explain this lack of reaction. First of all, if Unicredit is an Italian bank and Commerzbank a German bank, the cross-border nature of a potential marriage must be put into perspective. Unicredit is indeed very present in Germany, where the Italian group entered in 2005 with the acquisition of Hypovereinsbank (HVB). ​​Germany thus represented its second market in 2023, with 22% of its total revenues.

In a note published last week, the research firm Alphavalue considered that Unicredit’s intentions should be considered more “as a domestic approach rather than a cross-border operation, the Italian bank being more likely to seek a merger with its German division HVB rather than wanting to create a European banking giant”.

Beyond the specific Unicredit-Commerzbank case, consolidation remains a catalyst that is unlikely to materialize for French banks.

Cross-border operations appear complicated, if not impossible, to carry out in France.

In May, BNP Paribas CEO Jean-Laurent Bonnafé said he did not believe in such operations in Europe. “Only a domestic player can buy another domestic player,” he explained at his bank’s general meeting.

The CEO of Société Générale, Slawomir Krupa, made exactly the same speech, judging that the probability of a large-scale cross-border operation was “zero”. “Consolidation operations in Europe are extraordinarily improbable, for a series of reasons”, he declared in May, also at his group’s general meeting.

The first of these reasons was “regulatory: there are significant capital surcharges linked to the size of banking institutions,” he argued. The manager also stressed that it was historically difficult to extract synergies in the context of a cross-border operation. One of the synergies in question is “that of being able to use liquidity at the level of the banking group and not of its various national locations.” However, this is today “very largely limited by the structure of the banking union” with the restrictions “linked to the circulation of cross-border liquidity,” he explained.

An industry analyst interviewed by News Bulletin 247 in May agreed with them: “There is no single banking market in Europe and cross-border consolidation is out of fashion,” he said.

Foreign consolidation impossible

Certainly, in other European countries, foreign banks may have large local subsidiaries, which can facilitate mergers.

But the situation is very different in France. The Sino-British HSBC and the Dutch ING recently left the French market, after having failed there. So much so that the foreign presence in France is limited to neobanks (N26, Revolut). In essence, this again restricts the synergies that would be created through a merger with other European banks.

Alphavalue also believes that difficult market conditions in France make the country unattractive for cross-border operations. Competition is intense due to the presence of powerful mutualist institutions, and regulation is very important. “Fierce competition in the mortgage market and the heavy burden of regulation have squeezed margins and volume growth in a fragmented market, limiting attractiveness for players not yet present” in France, argues Alphavalue.

The research office also mentions “Darwinism”, meaning that French banks have now become too large, with too strong an international presence, to be considered prey.

Unlikely domestic operations

There remains domestic consolidation. But this is again proving almost impossible to implement. Crédit Agricole SA must be removed from the equation in any case, because the group remains above all the listed vehicle of Crédit Agricole, a mutual bank. Which makes any merger very complex.

More broadly, mergers between listed banks and mutual banks are unlikely, as their corporate cultures are very different, as are their exposures in terms of revenues, notes Alphavalue. Listed banks, for example, have a much larger presence in corporate and investment banking as well as in car leasing.

The research office therefore stresses that the only viable option would be, on paper, a merger between BNP Paribas and Société Générale. But Alphavalue finds only very limited interest in such an operation.

Given its size, which is larger than that of Société Générale, BNP Paribas would necessarily be the consolidator. And, according to the research office, the only potentially interesting asset of Société Générale for the bank on rue d’Antin would be its financing and investment bank. However, until now, BNP Paribas has largely preferred organic growth in this activity, rather than acquisitions.

And in any case, French banks have chosen, in their strategy, to develop in businesses in which they have competitive advantages, rather than to grow significantly by buying generalist groups. Crédit Agricole SA has particularly developed asset collection businesses and automobile financing, BNP has strengthened its position in asset management. And Alphavalue believes that these establishments will continue this strategy.

Moreover, even if Alphavalue does not really mention this point (except for car leasing where it considers that competition problems would arise), a Societe Generale-BNP Paribas merger would undoubtedly cause regulatory difficulties and political pressures.

Contacted by News Bulletin 247, Société Générale and BNP Paribas both reiterated that they do not comment on market speculation.

Finally, it should be noted that domestic consolidation has already taken place several years ago in France, with a limited number of large players now. The last major operation remains the merger between the Banques Populaires and Caisses d’Epagne groups in 2009. This domestic consolidation is much less advanced in Italy, for example.

Investors will therefore have to find other arguments than consolidation to play French banks on the stock market. This does not prevent French groups from presenting several attractions: they are low valued and should, in addition, suffer less from rate cuts than other European establishments.