Top bankers expect EU stress tests to reignite banking M&A

DAVOS, Switzerland Sun Jan 26, 2014 6:09am EST

European Central Bank (ECB) President Mario Draghi attends a session at the annual meeting of the World Economic Forum (WEF) in Davos January 24, 2014. REUTERS/Ruben Sprich

European Central Bank (ECB) President Mario Draghi attends a session at the annual meeting of the World Economic Forum (WEF) in Davos January 24, 2014.

Credit: Reuters/Ruben Sprich

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DAVOS, Switzerland (Reuters) - Bankers expect a thorough European Central Bank (ECB) health check of the euro zone's largest banks to reignite domestic and cross-border merger activity by rebuilding confidence among lenders.

The sovereign debt crises that nearly caused a break-up of the single currency in 2011/12 has generated mistrust among banks and caused an effective breakdown of cross-border bank investment flows as they hoarded capital at home.

But the ECB's asset quality review, an assessment of the balance sheets of more than 120 banks that is due to be completed next autumn, should bring transparency on the quality of banks' loans and other assets, bankers and regulators at the World Economic Forum in Davos said.

The initial increase in merger activity is expected to take place within single countries as weaker companies restructure and accept effective takeovers by domestic rivals, but bankers believe this will then spread to a pan-European level.

"The pre-conditions are there," Deutsche Bank (DBKGn.DE) CEO Anshu Jain said when asked whether the EU health checks on banks and the move towards banking union would bring cross-border deals.

However, Jain added that progress will not come overnight. "I am not predicting a wave (of deals)," he said.

Bankers say that the latest checks on capital and stress tests of banks' resilience to shocks must be rigorous, pointing to the 2011 tests that found no weaknesses among Spanish and Irish banks, even though the countries subsequently asked for bailouts of their banking sectors.

European Monetary Affairs Commissioner Olli Rehn said that banks are already preparing for the results of the stress tests by raising capital on the market, with about 80 billion euros raised to strengthen banks over the past couple of years.

There is unlikely to be significant further consolidation in the Spanish banking sector, which has already shrunk from about 50 players at the start of the sovereign debt crisis to fewer than 10.

ITALIAN DEALS?

Italian banks, however, appear still to have some way to go as the likes of Banca Monte dei Paschi di Siena (BMPS.MI) and Banco Popolare (BAPO.MI), the country's third and fourth-largest banks respectively, seek to raise more capital.

Mid-sized Italian banks are candidates for mergers, Bank of Italy Governor Ignazio Visco and the CEOs of Italy's two largest banks, UniCredit (CRDI.MI) and IntesaSanpaolo (ISP.MI), told Reuters in interviews in Davos.

"For sure, some (mid-level) banks will need some additional capital. It's possible to start to see consolidation at that level," UniCredit CEO Federico Ghizzoni said.

"It will be interesting to see what happens after the asset quality review, not only in Italy but also at the European level," he said, adding that he expects cross-border deals.

However, Giovanni Bossi, CEO of smaller Italian bank IFIS (IF.MI), cautioned against merging "two small weak players to create a larger weak one".

Some bankers said that consolidation would not be constrained within the euro zone because banks need to scale up to afford technological investment and cut costs.

One banker said he expected a consolidation wave among Swiss private banks as they move towards a system of automatic exchange of tax information with foreign authorities.

Another senior executive at a European bank said that the forthcoming banking union under ECB supervision will also bring M&A activity. "With time, there will be cross-border mergers," he said.

(Additional reporting by Paul Taylor; Editing by David Goodman)

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Comments (3)
ruhr wrote:
Does the discussion of M&A activity by bankers, at the World Economic Forum indicate leadership at the European Central Bank no longer views the concept of “too big to fail” as relevant?

Is not the better course of action one opposed to calls by bankers for increased M&A activity, but a course of action concerned with the maintenance of a robust competitive banking landscape?

If the leadership of the European Union follows the line of thinking of the bankers, will it not lead to the situation existing in the U.S.A that sees the majors dominate the markets, stymie government and regulatory policy, and exacerbate fears of “too big to fail”.

By all means actions to improve the transparency, liquidity, integrity and credibility of banks and bankers should be addressed, including steps to examine the risk profile of banking products offered and how they are promoted; it is doubtful this can be achieved where the conversation is led by bankers.

Taxpayers and governments the world over are still struggling to extricate themselves from the worst of the 2007/8 financial crisis, the capacity of taxpayers and government to absorb further losses is limited; increased competition, strong independent regulatory oversight including strong oversight of financial product risks, should be used to mitigate the likelihood of a similar situation in the short and long term.

Now is the time for leadership the world over to lead the conservation and, not be led by the exhortations of the self-interested.

Jan 28, 2014 4:51pm EST  --  Report as abuse
bdmeyers wrote:
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Jan 29, 2014 11:56am EST  --  Report as abuse
I have to agree with the commenter, Ruhr, that shouldn’t we be going in the opposite direction of banking M&A? Now that the world knows for a fact that it is interconnected – confirmed by the mutual path of self-destruction incurred in 2007-2008 – shouldn’t the world be taking initiatives to separate itself and its risk? Isn’t one of the fundamental ways to do this by maintaining smaller, more competitive, somewhat isolated banking and financial markets, as an alternative to one giant inextricably-linked singular market manned by enormous financial institutions that are too-big-to-fail? Someone important at Davos, or better yet, the BIS, needs to rethink the concepts of risk and default, don’t they?

Jan 29, 2014 9:01pm EST  --  Report as abuse
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