What Buying Commerzbank Would Mean for UniCredit — and the Banking Sector – NBC 5 Dallas-Fort Worth

• Last week, UniCredit announced it had acquired a 9% stake in Commerzbank, confirming that half of those shares were acquired from the government.
• UniCredit continues to surprise markets with excellent quarterly results.
• Last year, the company earned €8.6 billion (up 54% year-on-year), while also winning investor recognition thanks to share buybacks and dividends.
• Analysts hope UniCredit’s move will encourage more cross-border consolidation.

UniCredit’s decision to take a stake in German bank Commerzbank raises questions about whether the long-awaited cross-border merger could trigger more takeovers and shake up Europe’s banking sector.

UniCredit announced last week that it had acquired a 9% stake in Commerzbank, confirming that half of that stake was acquired from the government. Berlin has been Commerzbank’s top shareholder since it injected 18.2 billion euros ($20.2 billion) to rescue the lender during the 2008 financial crisis.

UniCredit has also expressed interest in a merger between the two banks, with the Italian bank’s CEO Andrea Orcel telling Bloomberg TV that “all options are on the table,” citing the possibility of either doing nothing or buying on the open market. Commerzbank has responded more coolly to the merger proposals.

Analysts, however, welcomed UniCredit’s move, especially since the combination could spur similar activity in the European banking sector, which is often seen as more fragmented than in the U.S., with regulatory hurdles and past problems making it difficult to close large deals.

Is UniCredit right for you?

The market has so far reacted positively to UniCredit’s move. Commerzbank shares rose 20% on the day UniCredit’s stake was announced. The German lender’s shares have risen about 48% this year and were up another 3% on Wednesday.

Investors appreciate the geographic overlap between the two banks, the consistency of their financials and the assumption that the deal is “collaborative,” UBS analysts led by Ignacio Cerezo said in a research note last week. The ball is now in Commerzbank’s court, UBS said.

Analysts at Berenberg wrote in a note last week that the potential merger “should theoretically have a limited impact on UniCredit’s capital distribution plans.” They said that while there is “strategic upside” to the deal, the immediate financial benefits for UniCredit could be modest and the potential risks associated with a cross-border transaction could mitigate some of the benefits.

David Benamou, chief investment officer at Axiom Alternative Investments, praised Orcel’s decision to take a stake in Commerzbank as a “fantastic move” that makes sense given the increased market share it would give UniCredit in Germany.

Because Commerzbank “didn’t have any costs in the second quarter (second quarter), its valuation is very low right now, so the timing for (Orcel) to step in was probably one of the best timings it could have had,” Benamou said in an interview with CNBC’s “Squawk Box Europe” last week.

Asked how close a takeover was in the short term, Benamou suggested it was possible, saying: “they’ll probably get there.”

UniCredit is already well on its way to becoming a leading bank in Europe, according to Arnaud Journois, Senior Vice President, European Financial Institutions Ratings at Morningstar DBRS.

He told CNBC’s “Street Signs Europe” on Wednesday that there was “double logic” behind UniCredit’s decision because it gives the Italian lender access to the German and Polish markets where Commerzbank currently operates.

“UniCredit has been very active over the last two years, making several targeted acquisitions… So this is the next logical step,” Journois said.

UniCredit continues to surprise markets with excellent quarterly profit results. Last year, it earned €8.6 billion (up 54% year-on-year), while also pleasing investors with share buybacks and dividends.

What does this mean for the sector?

Analysts hope UniCredit’s move will encourage more cross-border consolidation. European officials have increasingly commented on the need for bigger banks. French President Emmanuel Macron, for example, said in a Bloomberg interview in May that the European banking sector needed more consolidation.

“European countries can be partners, but sometimes they still compete with each other. So I know from the EU’s perspective, from the policymakers’ perspective, there is an appetite for more consolidation. But we think there are a few obstacles that make it difficult, especially on the regulatory side,” Journois told CNBC.

According to Reint Gropp, president of the Hall Institute for Economic Research, a cross-border merger of UniCredit and Commerzbank would be more beneficial than a domestic merger of Deutsche Bank and Commerzbank.

“The German banking structure has long needed a consolidation process. Basically, Germany still has almost half of all banks in the eurozone, which is significantly more than its share of GDP. So any consolidation process would be welcome now,” Gropp told CNBC’s “Street Signs Europe” on Wednesday.

He noted that Commerzbank has always been a “big takeover candidate” in the German banking sector because most of the country’s other banks are savings banks, which cannot be taken over by private institutions, or cooperative banks, which are also difficult takeover targets.

Will Deutsche Bank attack?

Deutsche Bank, which was still seen as a leading candidate to take over Commerzbank after initial talks abruptly collapsed in 2019, is said to be developing its own defensive strategy in the face of UniCredit’s bid.

Filippo Alloatti, CFO of Federated Hermes, said Deutsche Bank would most likely not present Commerzbank with a strong competitive offer.

With a CET1 ratio of 13.5% compared to a target of 13%, Deutsche Bank is rather “constrained.” CET ratios are used to assess the financial strength of a lender. The German bank also has less excess capital than UniCredit and therefore “cannot really afford” a takeover, Alloatti said.

However, Deutsche Bank could put on a “brave face,” Alloatti suggested, and consider another target, such as ABN Amro. The Dutch bank, which was also bailed out by the state during the 2008 financial crisis, has been the subject of takeover speculation.

“We’ve been waiting for this,” Alloatti said, speaking of the potential for further consolidation in the sector. “If they (UniCredit) succeed, then of course other management teams will look at this case,” he said, noting that Italy also has room for domestic consolidation.

Gropp admitted that the UniCredit CEO had made a “very bold move” that surprised both the German government and Commerzbank.

“But perhaps we need a bold step to make any changes at all to the European banking system, something we have been waiting for for a long time,” he said.

What’s next?

In comments published by Reuters, Commerzbank Chief Executive Manfred Knof told reporters on Monday that he would consider any proposal from UniCredit, provided it was consistent with the bank’s commitments to its stakeholders.

Knof informed the bank’s supervisory board last week that he would not seek an extension of his contract, which runs until the end of 2025. German daily Handelsblatt reported that the supervisory board may consider an earlier change of management.

Commerzbank’s supervisory board will meet next week to discuss UniCredit’s stake, people familiar with the matter told CNBC, who declined to be named. There are no plans to replace Knof immediately after that meeting, the sources added.

– CNBC’s Annette Weisbach, Silvia Amaro and Ruxandra Iordache contributed to this report.