By Marco Troiano, Financial Institutions

Since 2022, the combination of higher interest rates and benign asset-quality dynamics has supported banks’ performance and we have seen an acceleration in government divestments of bank stakes acquired at the time of the Global Financial Crisis (GFC), marking an important late milestone in the post-GFC normalisation of the sector.

The GFC marked an era of unprecedented upheaval for the financial sector, leading to the nationalisation of several banks across Europe. Although markets and economies have since recovered and post-GFC regulatory reforms have significantly reshaped the risk profile of the industry, governments have been slow in reducing their stakes in nationalised banks.

• The re-privatisation of several large banking groups is now well underway, including:
• NatWest in the UK (government stake now down to 15.99%),
• Commerzbank (German government stake 12.11% following the sale of a 4.49% stake to UniCredit in an accelerated bookbuild in September 2024),
• ABN AMRO in the Netherlands (40.5% following the termination of the trading plan on 11 September to sell depositary receipts for shares, for proceeds of EUR 1.17bn),
• Banca Monte dei Paschi di Siena in Italy (26.73% after a EUR 650m accelerated bookbuild in March 2024, equivalent to a 12.5% stake),
• Allied Irish Banks in Ireland (22%), and
• National Bank of Greece (8.39% following a EUR 691m fully-marketed secondary offering in October 2024 equivalent to 10%).

De Volksbank in the Netherlands and Belfius Bank in Belgium are still 100% owned by their respective governments, with more uncertainty around the privatisation timeline, though it remains the ultimate objective. Many other sales processes could be finalised by the end of 2025 provided market conditions remain supportive.

We welcome this divestment process as we believe it will positively contribute to strengthening market confidence in the sector, which can now operate independently following years of restructuring, de-risking and re-regulation. The divestments will also allow institutions to pursue strategic shifts and growth opportunities, with more effective capital allocation free from government influence.

We believe large government stakes may have discouraged potential cross border M&A in the past, as in any transaction a bidder would either have ended up with a foreign government as a key shareholder or would have had to negotiate with a foreign government around selling its stake. Removing the overhang of large government ownership could therefore facilitate the cross-border consolidation of the sector. See UniCredit: Commerzbank takeover unlikely without German government approval.

UniCredit’s recent stake building in Commerzbank shows that despite significant hurdles associated with cross-border consolidation, institutions are still willing to engage under certain conditions. In this case, we believe the domestic synergies arising from the potential in-market merger of UniCredit Germany with Commerzbank increase the appeal of Commerzbank for the Italian group.

While a formal deal is not yet on the table, such a combination would significantly strengthen UniCredit’s competitive position in Germany, particularly in the corporate banking segment. This could serve as a blueprint for large French banks looking to further their presence in Italy and Belgium, where they could also extract significant cost synergies given their existing domestic presence.

Outside of cases where a large cross-border group seeks to strengthen an existing foreign franchise, we believe the economics of international bank M&A remain challenging. The lack of branch network overlaps limits cost synergies, outside of large capex to keep up with the digital banking and big data arms race.

Potential revenue synergies, such as expanding the distribution reach of product factories to a foreign target’s client base, are subject to greater execution risk and tend to command a discount. Funding synergies derived from arbitraging structural differences in national deposit markets are also subject to some uncertainty while risks (or perceived risks) to their fungibility in a crisis persist.

Nevertheless, acquiring a well-established, de-risked franchise in a euro area (EA) country could be attractive to institutions looking to bolster their business models by pursuing greater geographical diversification, reduce the volatility of their performance through the cycle and therefore lower their overall risk profiles.

We believe the greatest strategic benefits would come from combinations that bridge the EA core and periphery divide. A combination of a bank headquartered in a core EA country and one from a EA peripheral country would offer greater diversification benefits, reducing a bank's risk profile given the increased exposure to different operating environments. Such a combination could also help dilute sovereign risk exposure and create opportunities to improve returns in countries where profitability is constrained by excess domestic savings.

While it is difficult to quantify and incorporate into any ex-ante synergy and profitability analysis, we believe such geographic and risk diversification could, over time, translate into better funding costs. From Scope’s perspective, this could result in better rating outcomes as geographic and product diversification are key drivers of our business model assessments.

However, we acknowledge that this alone is likely to be insufficient to justify paying a premium for a cross-border deal, especially in the absence of more direct funding benefits and capital synergies that could only emerge with the completion of the European Banking Union (see Full depositor preference a step towards EDIS?).

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