What buying Commerzbank would mean for UniCredit — and the banking sector

UniCredit‘s move to take a stake in German lender Commerzbank is raising questions on whether a long awaited cross-border merger could spur more acquisitions and shake up the European banking sector.

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

UniCredit also expressed an interest in a merger of the two, with the Italian bank’s CEO Andrea Orcel telling Bloomberg TV that “all options are on the table,” citing the possibility that it either takes no further action or buys in the open market. Commerzbank has given a more lukewarm response to the merger proposals.

Orcel said the Italian bank was able to buy 4.5% of the state’s stake in Commerzbank because the government trusts UniCredit, Reuters reported Thursday citing local media. When asked if UniCredit would launch an unsolicited tender offer to buy out other investors in Commerzbank, the CEO told the Italian paper: “No, it would be an aggressive move.”

But analysts have welcomed the move by UniCredit, particularly because a tie-up might spur similar activity in Europe’s banking sector — which is often seen as more fragmented than in the U.S., with regulatory hurdles and legacy issues providing obstacles to mega deals.

So far, the market has responded positively to UniCredit’s move. Commerzbank shares jumped 20% on the day UniCredit’s stake was announced. Shares of the German lender are up around 48% so far this year and added another 3% on Wednesday.

Investors appreciate the geographical overlap between the two banks, the consistency in financials and an assumption that the transaction is “collaborative” in nature, UBS analysts, led by Ignacio Cerezo, said in a research note last week. According to UBS, the ball is now in Commerzbank’s court.

Analysts at Berenberg said in a note last week that a potential merger deal, “should, in theory, have a limited effect on UniCredit’s capital distribution plans.” They said that while there is “strategic merit” in a deal, the immediate financial benefits might be modest for UniCredit, with potential risks from the cross-border deal diminishing some of the benefit.

David Benamou, chief investment officer at Axiom Alternative Investments, hailed Orcel’s decision to take a stake in Commerzbank as a “fantastic move” that makes sense because of the increase in German market share it would grant UniCredit.

As Commerzbank “missed on costs in Q2 [the second quarter], currently it’s at a very low valuation, so the moment [Orcel] stepped in, is probably one of the best moments he could have,” Benamou told CNBC’s “Squawk Box Europe” last week.

When asked how imminent a takeover was in the short term, Benamou suggested it was possible, saying, “they will probably come to it.”

According to Arnaud Journois, senior vice president of European Financial Institution Ratings at Morningstar DBRS, UniCredit is already on its way to becoming a leading bank in Europe.

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

“UniCredit has been very active in the past two years, doing a few targeted acquisitions … So this is the next logical step,” Journois said.

UniCredit continues to surprise markets with some stellar quarterly profit beats. It earned 8.6 billion euros last year (up 54% year-on-year), also pleasing investors via share buybacks and dividends.

Analysts are hoping that a move by UniCredit will encourage more cross-border consolidation. European officials have been making more and more comments about the need for bigger banks. French President Emmanuel Macron, for example, said in May in an interview with Bloomberg that Europe’s banking sector needs greater consolidation.

“European countries might be partners, but they are still competing sometimes. So, I know that from an EU standpoint — policymaker standpoint — there is appetite for more consolidation to happen. However, we think that there are a few hurdles that make that difficult, especially on the regulatory side,” Journois told CNBC.

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

“The German banking structure is long overdue for a consolidation process. Essentially, Germany still has almost half of all banks in the euro zone, that’s significantly more than its share in 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 candidate for a takeover” in the German banking sector because most of the other banks in the country are savings banks which cannot be taken over by private institutions, or cooperative banks which are also difficult takeover targets.

Deutsche Bank, which was still seen as the prime contender to take over Commerzbank following an abrupt collapse of initial talks in 2019, is said to be mounting its own defense strategy in the wake of UniCredit’s stake.

Filippo Alloatti, head of financials at Federated Hermes, said Deutsche Bank is unlikely to present a strong rival offer for Commerzbank.

With a CET1 ratio of 13.5% compared to its target of 13%, Deutsche Bank is rather “limited.” CET ratios are used to gauge 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 during the 2008 financial crisis by the state, has been the subject of acquisition speculation.

“We’ve been waiting for this,” Alloatti said, speaking about the potential for further consolidation in the sector. “If they [UniCredit] are successful, then of course, other management teams will study this case,” he said, noting that there was also scope in Italy for domestic consolidation.

Gropp acknowledged that UniCredit’s CEO had made a “very bold move” that caught both the German government and Commerzbank by surprise.

“But maybe we need a bold move to effect any changes at all in the European banking system, which is long overdue,” he said.

In comments reported by Reuters, Commerzbank’s Chief Executive Manfred Knof told reporters on Monday that he would look at any proposals from UniCredit in line with the bank’s obligations 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 newspaper Handelsblatt reported that the board might be considering an earlier change of leadership.

The supervisory board at Commerzbank will meet next week to discuss UniCredit’s stake, people familiar with the matter who preferred to remain anonymous told CNBC. There are no plans to replace Knof as soon as that meeting, the sources added.

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