Breakingviews: Europe’s bank M&A wave will sweep Mediterranean

Some mergers are bold strategic gambits. Others are about stemming the bleeding. The latest outbreak of European bank M&A is firmly in the latter category. That makes it easier to spot potential targets.

Low interest rates and mounting bad loans from the pandemic have forced European lenders to consider overdue consolidation. In Spain, 12 billion euro Caixabank is in talks to absorb 4 billion euro Bankia. That fits the template set earlier this year when Italy’s Intesa Sanpaolo bought rival UBI Banca: a larger, more robust lender swallowing a relative local minnow.

There are many such potential targets in Europe, according to a Breakingviews index which uses four financial metrics to spot the sector’s weak links. The first measure is operating expenses as a percentage of revenue: a high number means greater potential savings from sharing branches and technology with a larger partner. Next are the bank’s market capitalisation relative to its tangible book value, and its return on tangible equity. In both cases a lower number indicates dismal standalone prospects. Last is capital: lenders with a lower common equity Tier 1 ratio have less firepower to absorb dud credit and invest for the future.

The index orders banks based in major European economies with a market value between 1 billion euros and 15 billion euros. It assigns points based on their rank in each category and combines these to produce an overall M&A score.

Spain and Italy dominate, taking six of the top 10 spots. Lenders like Banca Monte dei Paschi di Siena, Banco BPM, Banco de Sabadell and Unicaja Banco are all potential targets. They also have potential acquirers in larger compatriots like UniCredit in Italy and Banco Santander and BBVA in Spain. A combination of Santander and Sabadell, for example, could even yield savings outside Spain, since both have UK operations.

Things are more complicated for Frankfurt-based Commerzbank, which takes third place. Talks with Deutsche Bank collapsed last year. UniCredit and Dutch giant ING have compatible German businesses, but cross-border deals are politically dicey.

It’s worse for France’s Société Générale and Netherlands-based ABN Amro Bank, both lowly valued lenders with high costs and little chance of earning an economic return in the near future. But they’re probably too big to merge with domestic rivals BNP Paribas and ING.

A merger wave is far from certain: in most cases there are good reasons why buyers have so far stayed away. But if the recent pickup in M&A activity is sustained, bidders will have these targets in their sights.

Click here for the full interactive table

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