What the Commerzbank acquisition means for UniCredit and Deutsche Bank

UniCredit BankA move to take a stake in a German bank Commerzbank Questions have been raised about whether the long-awaited cross-border merger will spur more takeovers and shake up Europe’s banking industry.

Last week, UniCredit announced the acquisition of a 9% stake in Commerzbank, confirming that half of the shares were acquired from the government. Berlin has been the bank’s main shareholder since Commerzbank injected 18.2 billion euros ($20.2 billion) to rescue the bank during the 2008 financial crisis.

UniCredit has also expressed interest in merging the two companies, with Bank of Italy CEO Andrea Orcel telling Bloomberg TV that “all options are on the table,” citing the bank’s ability to either Take no further action or purchase on the open market. Commerzbank’s reaction to the merger proposal was muted.

According to local media reports quoted by Reuters on Thursday, Orser said that Italian banks were able to buy 4.5% of the state’s shares in Commerzbank because the government trusted UniCredit Bank. Asked whether UniCredit would make an unsolicited offer to buy out shares from Commerzbank’s other investors, the CEO told the Italian newspaper: “No, it would be a radical move.”

But analysts welcomed UniCredit’s move, particularly because the tie-up could spur similar activity in Europe’s banking industry, which is generally seen as more fragmented than in the U.S., where regulatory hurdles and legacy issues provide barriers to large deals.

So far, the market has reacted positively to UniCredit’s move. On the day UniCredit announced its stake, Commerzbank’s share price rose 20%. The German bank’s shares, which have gained about 48% so far this year, rose another 3% on Wednesday.

UBS analysts led by Ignacio Cerezo said in a research note last week that investors appreciate the geographic overlap between the two banks, the consistency of their financial profiles and the nature of the deal. It is the assumption of “cooperation”. The ball is now in Commerzbank’s court, according to UBS.

Berenberg analysts said in a note last week that a potential merger would have “theoretically a limited impact on UniCredit’s capital allocation plan.” They said that while the deal had “strategic value”, the direct financial benefits to UniCredit were likely to be modest, with potential risks of a cross-border deal eroding some of the benefits.

David Benamou, chief investment officer of Axiom Alternative Investments, praised Orcel’s decision to take a stake in Commerzbank, calling it a “remarkable move” that will increase UniCredit’s market share in Germany.

As Commerzbank ‘misses out on Q2 costs’ [the second quarter]the current valuation is very low, so currently [Orcel] “Stepping in, it was probably one of the best moments he could have had,” Benamou told CNBC’s “Squawk Box Europe” last week.

Asked about the imminence of an acquisition in the near term, Benamou said it was possible, saying: “They might do it.”

Arnaud Journois, senior vice president of Morningstar DBRS European Financial Institutions Ratings, said UniCredit is already on the path to becoming a leading bank in Europe.

He told CNBC’s “Street Signs Europe” on Wednesday that there was a “double logic” behind UniCredit’s move, as it would give the Italian bank access to the German and Polish markets where Commerzbank currently operates.

“UniCredit has been very active over the past two years, making a number of targeted acquisitions…so this is the next logical step,” Journois said.

UniCredit continues to surprise the market with some stellar quarterly profits. The company achieved a profit of 8.6 billion euros last year (a 54% year-on-year increase) and also satisfied investors through share buybacks and dividends.

Analysts hope UniCredit’s move will encourage more cross-border consolidation. European officials are increasingly talking about the need for bigger banks. For example, French President Emmanuel Macron said in an interview with Bloomberg in May that the European banking industry needed greater integration.

“European countries may be partners, but sometimes they are still competing. So, I know that from an EU perspective – a policymaker’s perspective – there is an interest in more integration. However, we think there are some barriers to that changing It’s difficult especially on the regulatory side,” Journois told CNBC.

Reint Gropp, director of the Hall Economics Institute, said a cross-border merger between UniCredit and Commerzbank would be more favorable than a domestic merger between Deutsche Bank and Commerzbank.

“Germany’s banking structure is long overdue for consolidation,” Gropp told CNBC. “Essentially, Germany still owns almost half of the banks in the eurozone, which is much higher than its share of GDP. So now, Any integration process would be welcome.

He pointed out that Commerzbank has always been an “important candidate for acquisition” in the German banking industry because the country’s other banks are mostly savings banks that cannot be taken over by private institutions, or cooperative banks that are also difficult to be acquired.

Deutsche BankThe bank, still seen as a leading contender to take over Commerzbank after initial talks suddenly collapsed in 2019, is said to be developing its own defensive strategy after UniCredit took a stake.

Federated Hermes finance chief Filippo Alloatti said Deutsche Bank was unlikely to make a strong rival offer to Commerzbank.

Deutsche Bank’s CET1 ratio is 13.5%, compared with its target of 13%, so its level is quite “limited”. The CET ratio is a measure of a lender’s financial strength. The German bank also has less excess capital than UniCredit and so “can’t really afford” the acquisition, Allodi said.

However, Alloti suggested that Deutsche Bank could put on a “brave face” and consider another target, such as ABN AMRO. The Dutch bank, which also received a state bailout during the 2008 financial crisis, has been the subject of takeover speculation.

“We’ve been waiting for this,” Allodi said of the potential for further consolidation in the industry. “If they [UniCredit] If it succeeds, then of course other management teams will look into the case,” he said, noting that there was also room for domestic consolidation in Italy.

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

“But perhaps we need bold steps to make any changes to the European banking system, which are long overdue,” he said.

In comments reported by Reuters, Commerzbank Chief Executive Manfred Knof told reporters on Monday that he would consider any UniCredit proposal in light of the bank’s obligations to stakeholders.

Nove told the bank’s supervisory board last week that he would not seek to extend the contract until the end of 2025.

Commerzbank’s supervisory board will meet next week to discuss the UniCredit stake, people familiar with the matter told CNBC on condition of anonymity. There are no plans to replace Nove immediately after this meeting, the source added.

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