By Peter Bergman (MoneyAmped.com)
Investors who were optimistic about European banks found it hard to come by in 2020 when merger discussions between BBVA and Sabadell halted. Low interest rates, stringent restrictions, and slow economic development over the last decade have made them unsustainable and unattractive.
Both financial institutions were typical of their Spanish counterparts. Just under forty percent of its 2007 peak, BBVA’s market worth is €26bn ($32bn) at now. A far smaller portion of Sabadell’s equity’s accounting (“book”) is worth than its €2bn valuation.
Significant Improvement in the Position of European Banks
On May 6th, a new chapter began for European banks as Sabadell rejected yet another proposal from BBVA, this time with an offer of €12bn. The stock of central European banks experienced a significant increase of 20% this year, surpassing the overall market growth by more than double.
Financial institutions have become less risky, with higher capital ratios and a decrease in the proportion of bad loans on their balance sheets. As a result, they have also become more profitable. Increased interest rates, which prove advantageous for banks by expanding the difference between what they earn on assets (loans) and what they spend on liabilities (deposits), have endured for a longer duration than initially anticipated.
Shareholders continue to receive positive updates. UniCredit, Italy’s second-largest bank, announced a quarterly profit of €2.6bn on May 7th, marking a 24% increase compared to the previous year. The company’s stock has experienced a remarkable 46% increase in value since the beginning of the year. On the very same day, UBS, a Swiss bank, revealed its successful turnaround just one year after acquiring Credit Suisse. These developments signal a potential for increased dealmaking and a brighter future for European banks.
BBVA made an aggressive bid for Sabadell on May 9th, offering the same terms that the bank had previously turned down. Regardless of the result, its deeds are bound to motivate others. Expectations have been heightened by the vows that have resonated across the English Channel. In March, Nationwide, a British bank, reached an agreement to acquire Virgin Money, a competing financial institution, for a substantial sum of £2.9 billion ($3.7 billion).
Investor excitement could potentially motivate bank executives to revisit their plans for making deals. According to Nicolas Véron, a financial-policy analyst, doubts will be swiftly dispelled. That held the previous time European bank stocks were in high demand.
As less visible players banded together within their markets, European bankers clandestinely came to agreements during and after the global financial crisis of 2007–2009. Instead of the frenzied cross-border takeovers that were popular before the crisis, any new wave of dealmaking is likely to mirror similar domestic consolidation.
Importance of Quick Solutions to Pressing Problems
In what ways may more ambitious negotiations be inspired? Developments in Europe’s half-finished financial union could be a contributing element. With an accurate banking single market, it is more reasonable to establish a pan-European lender.
Another unsettling fact is the close relationship that governments still have with their biggest domestic debtors. Improving the banking system’s competition and unity is hindered by the absence of a collective deposit-insurance policy, which would include European authorities guaranteeing clients’ savings.
A “hybrid” insurance approach was recently advocated by Joachim Nagel, the head of Germany’s central bank. With this arrangement, national deposit programs would be kept, and extra European support would be added.
Nevertheless, the implementation of this compromise in the foreseeable future is unlikely. Challenges also arise when it comes to agreements between local competitors. When interest rates increase, the worth of a bank’s assets with longer maturities decreases.
These paper losses can be painful when assets are sold hastily or when a bank is purchased, as accounting regulations mandate that the seller’s balance sheet be adjusted to reflect current market values. When UBS acquired Credit Suisse in June, it devalued the worth of its former competitor’s portfolio by $15 billion. By the conclusion of 2023, Sabadell recorded unrealized losses exceeding €5bn on their financial assets.
However, there has been improvement in this area: the issue of paper losses is not as significant as it was a year ago. According to analysts at Barclays Bank, the losses incurred by Italian banks decreased from 10% to 5% of their market value in 2023.
Time for Mergers and Acquisitions
This has left numerous banks appearing ready for transactions. Out of the companies monitored by the Stoxx 600 banks index, almost 66% are presently valued below their book value. Approximately 40% of these entities are projected to yield a return on equity of less than 12% for the current year, which gives the impression of being undervalued and indicates that they may perform more favorably as components of larger organizations.
Sabadell is a prime example of a bank that fits this description. Deutsche Bank and Commerzbank, two German financial institutions that have frequently been speculated to merge, are also among them. Another one, ABN AMRO, is still under government control, with the Dutch government as the biggest shareholder. With the Italian treasury gradually reducing its stake in Monte dei Paschi, the country’s oldest bank, it has become a topic of frequent discussion regarding potential takeovers.
An attempt by or for any of these banks could trigger a flurry of transactions, as the fear of being left behind is a strong driving force. Maybe offers will even surface from outside of Europe. If the continent’s bankers remain inactive, foreign banks or private equity funds might start showing interest. At the very least, it would compel the European banking executives to come to the negotiating table.
