UniCredit and Commerzbank were at the height of the merger negotiations this year before the Ukrainian war reached an agreement that could set off a long-awaited wave of cross-border consolidation of European banking.
Three people with direct knowledge of the matter told the Financial Times that in early 2022, UniCredit CEO Andrea Orcel planned informal discussions about a potential combination of the Italian creditor’s German subsidiary HypoVereinsbank and its Commerzbank counterpart, Manfred Knof.
The transaction would create Germany’s second largest creditor with € 785 billion in assets, 1,000 branches and 48,000 employees.
Analysts have long seen the merger between UniCredit and Commerzbank as one of the most attractive combinations in European banking, as there is relatively little regional overlap between German lender operations.
HypoVereinsbank, which Milan UniCredit acquired in 2005 and is more profitable than its German counterpart, has a strong local footprint in Bavaria and the Hamburg area, while Commerzbank operates throughout Germany.
The agreement, previously explored by UniCredit in 2019 as an alternative to the subsequently canceled Commerzbank merger with Deutsche Bank, would be the first major cross-border agreement in the fragmented European banking sector.
Orcel held a meeting in early 2022 in Germany to discuss the merger with Knof, according to people who know about the discussions. But before CEOs could eradicate details, Moscow invaded Ukraine.
Instead, UniCredit has decided that it needs to manage its exposure in Russia before embarking on any large business. UniCredit is one of the few Western banks with large operations in Russia.
Orcel said the group was considering leaving the country and revealed that in the worst case, it would lose 5.3 billion euros to the business. It has already started exchanging loan portfolios with local creditors.
The prospect of higher interest rates supported European creditors’ shares until the start of the war, with Commerzbank announcing a week before the invasion that higher interest rates in Europe would bring in an unexpected billion euros by 2024.
However, fears of the economic impact of the war and the potential disruption of Russian energy supplies have sent stock prices down since the end of February – UniCredit has lost more than a third and Commerzbank has fallen 26 percent.
US investors such as Capital Group have withdrawn from European banks over the past three months and sold large stakes in Commerzbank, Deutsche Bank and Barclays. The US fund manager was UniCredit’s largest shareholder, but reduced its stake from 6.8 percent to less than 4 percent last week.
The fragmented nature of the European banking market was seen as a disadvantage for its creditors, who had lost ground compared to US competitors in terms of profitability and market share.
EU regulators and policy makers have urged banks to consider mergers to improve economies of scale – but there have been no major cross-border agreements with banks that have complained that EU capital requirements and different regulatory regimes make mergers too punishable.
The merger between the two banks is still considered the most likely big deal, partly because Commerzbank has the German state as a 15% shareholder after the € 23 billion bailout in 2008 and 2009 – of which € 5 billion were guarantees – and analysts see it. for partial scale.
After a shareholder uprising that followed years of failure to reduce Commerzbank’s inflated cost base, Knof parachuted in January last year as part of a recent effort to restore profitability. In the first quarter of 2022, the bank’s net profit more than doubled to EUR 298 million, after a better-than-expected performance in 2021.
UniCredit originally contacted German officials about the merger with Commerzbank in 2017 and, according to people familiar with these steps, prepared an offer three years ago.
According to the original plans, UniCredit would acquire a significant stake in Commerzbank and merge it with HypoVereinsbank. The merged entity would have its registered office in Germany, while UniCredit would retain its registered office and listing in Milan. Commerzbank would retain the free shares listed on the Frankfurt Stock Exchange.
Commerzbank’s market capitalization has since fallen from € 9 billion to € 7.8 billion, while UniCredit’s stock market is worth € 21 billion, a third less than three years ago.
UniCredit and Commerzbank declined to comment.