By Alessandro Boratti, Analyst, Financial Institutions

Without the approval of the German government, we remain sceptical that UniCredit’s recent bid to increase its stake in Commerzbank to just below the 30% threshold that would trigger a mandatory public offer signals an immediate takeover attempt.

UniCredit has indicated that most of its economic exposure – comprising a 9% direct stake and approximately 12% through derivatives – is hedged, providing it with the flexibility to retain or increase its shareholding or sell it with capped downside. Because the German government has been openly critical of UniCredit’s actions, this cautious approach appears sensible. While mergers can create value, particularly through cost synergies, hostile deals can erode any benefits, especially when faced with resistance from both the target company and its government.

A takeover of Commerzbank by UniCredit would not constitute a classic cross-border transaction, as the financial rationale would rest on synergies arising from a domestic merger between Commerzbank and UniCredit’s HypoVereinsbank (HVB) subsidiary. We continue to believe that the rationale for domestic consolidation outweighs the rationale for large international deals. Without full European banking union, limited capital and funding synergies will continue to constrain the benefits of cross border deals, which also offer lower revenue and cost benefits.

UniCredit’s stake building in Commerzbank gives it optionality in any scenario. As Commerzbank’s largest shareholder, UniCredit will have substantial influence over Commerzbank's strategy and can act as a blocking shareholder to other overtures. From a purely financial perspective, UniCredit’s investment could also be worthwhile, as Commerzbank has increased its standalone strengths and improved its prospects as an independent entity.

UniCredit could adopt a wait-and-see approach, perhaps seeking support from European institutions such as the ECB, which has shown greater willingness to support cross-border consolidation. Mario Draghi's report on the future of European competitiveness report was the latest to call for larger pan-European players to counter the dominance of US banks in several segments of the European banking market. UniCredit could also try to soften political opposition, for instance by creating a holding company structure listed in Germany.

From UniCredit's point of view, a merger between HVB and Commerzbank presents several strategic advantages.

• The combined entity would become the second largest private lender in Germany after Deutsche Bank and one of the leading players in European corporate banking.
• The increase in scale in Germany should lead to significant cost synergies as mergers tend to reduce fixed and central costs. These efficiencies could result from a reduction in the overlap of the two banks' branch networks, especially in Bavaria and Germany’s largest cities. UniCredit could also seek to improve Commerzbank’s operating efficiency, similar to what HVB has achieved in recent quarters. HVB’s cost-to-income ratio fell below 40% in the first half of 2024, which compares well with Commerzbank’s 59%.
• UniCredit would also take control of mBank, Commerzbank's Polish subsidiary, allowing it to re-enter the largest CEE market after it exited during its own restructuring. UniCredit is also in the process of acquiring Vodeno, a Polish Banking-as-a-Service provider.
• UniCredit's international breadth would increase and Germany would become the group's largest market. This could lower the group’s funding costs, especially if it is accompanied by a dilution of its exposure to Italian sovereign debt.

With interest rates having peaked, UniCredit is looking for new ways to create value. The group’s management team has signalled a clear appetite for inorganic growth provided it creates value for shareholders. Last year's deals with Alpha Bank in Romania and Greece offer evidence of this strategy. UniCredit is well placed to pursue external growth opportunities supported by one of the largest capital buffers in the EU (560bp as of H1 2024), the result of solid earnings generation and optimisation of risk-weighted assets.

UniCredit's market capitalisation has risen sharply since 2021 and its shares are currently trading above book value, enabling it to consider share-based acquisitions from a position of strength. The management team’s credibility has been reinforced by strong group results, driven not just by a more favourable interest-rate environment but also by improving operational efficiency.

Issuer rating reports are available to ScopeOne subscribers:

Commerzbank AG
UniCredit SpA