Financial sector commentators have long-awaited consolidation amongst the fragmented European and UK banking sector, potentially creating a European super-bank ready to challenge the US banking giants. Hopes of this consolidation have further been sparked this year, with notable bank mergers and stake acquisitions between banks across the UK and continental Europe. However, with the political and regulatory hurdles in place for European and UK banks, some commentators are speculating that the predicted consolidation may already be over.
Following the financial crisis of 2008, European and UK banks largely obtained growth through organic acquisition of customers, and by shoring up additional capital to meet stringent capital requirements. As a result, return on capital for European and UK banks has historically lagged behind that of competitors in the US and has meant valuations have remained relatively low. These differing strategies has led to fragmentation for European and UK banks but also has led to global growth for certain US giants. Figures from S&P Global show that of the total assets under management European and UK banks lag significantly behind the top 5 global banks, which are headquartered in China and the US – only four banks in the top 20 are headquartered in the EU and two headquartered in the UK.[1]
However, there is a shift happening in the European and UK banking sector which could result in consolidated European and UK banks emerging.
Recent increases in interest rates coupled with improved capital bases mean European and UK banks have started to return value to shareholders at a markedly higher rate than previous years. Greater capital reserves mean banks are better placed to acquire rivals. Rising share prices for listed banks (many of which now trade at or above book value) mean equity consideration is more valuable and attractive to sellers. As interest rates start to fall, the incentive to grow through M&A will become ever more tempting.
In addition, customer demand for technology-driven banking solutions, the increased sophistication and multi-jurisdictional nature of transactions, plus non-traditional financial service providers trespassing into banking services, all mean European and UK banks will need to improve their product offering and technological solutions. In order to deliver, European and UK banks need to consider economies of scale and general cross-border capabilities. The fastest way for banks to achieve these efficiencies and a broader offering of services may be to acquire rivals in the banking space at a national level, although such targets may extend to other neighbouring jurisdictions.
Drivers for national consolidation in the UK
The UK provides a clear example of a drive amongst banks to achieve a lower degree of fragmentation on a national level.
The UK has had a bumper year of deal activity in its financial services sector, including the manoeuvring away from banking services by supermarkets (Tesco’s sale of its banking arm to Barclays, completed in October, and the sale of Sainsbury’s Argos credit card portfolio to NatWest in June); acquisitions of competitors (Nationwide purchasing its rival Virgin Money in March, and the acquisition of The Co-operative Bank by Coventry Building Society in May); strategic disposals of non-core products (Metro Banks’ sale of its mortgage portfolio to Barclays in September); and a continued decrease of holdings by the British government in NatWest.
In addition, although digital banks continue to gain customers and develop their product offering (Revolut being granted a UK banking licence in July; Monzo reporting first annual profit in June) they have not yet reached their long term lofty goals of usurping legacy banks and we may in future see consolidation in this sector. As venture capital slows down its historic investment in fintechs we may expect to see consolidation in attempts to achieve cost efficiencies, larger customer bases or a greater attempts to diversify their businesses, i.e. through monetising data and licensing technology. Also as we see fintechs backed by the major institutions becoming more successful in the UK and growing in Europe (Chase UK, a digital challenger backed by JPMorgan Chase) we may see consolidation in fintechs as they seek to compete.
As banks seek to bolster their competitive positions against a backdrop of continued market pressure, we may see other mid-sized banks and fintechs consolidate or non-banks with banking services in the UK spin-off their banking services arms. Might spare capital previously reserved for buybacks be utilised by Banks for acquisitions? With the comparatively low levels of IPOs in the UK in recent years, consolidation may be the solution for investors in smaller banks and challenger banks, in order to enhance value.
Consolidation in European banking?
Deal activity, including the acquisition of stakes in rival banks, at a national level across continental Europe has seen an increase– notably, UBS completed its landmark acquisition of Credit Suisse in July (albeit this was in a rescue context), Banco BPM acquired a stake in Monte Dei Paschie di Siena, and was itself subject to an offer from UniCredit this month (albeit this offer has been rejected by Banco BPM’s board).
However, it remains to be seen whether a cross-border bank consolidation in Europe that would create a bank large enough to challenge the US giants and fast-growing Asian counterparts, or whether recent potential deals have been a false-start to the trend.
Policymakers at the European level, including members of the Supervisory Board of the ECB, have in the past been optimistic that “cross-border consolidation can be an instrument for further integration of the European banking sector, and we stand by that. Consolidation can also help address long-standing issues in the European banking sector, such as low profitability.”[2] Key European authorities and policymakers, Christine Lagarde being one, argue that consolidated and competitive banks are “desirable”.[3]
Although the sentiment is positive, cross-border bank mergers remain extremely difficult to complete, as there is legal fragmentation across Europe, with no completion of the banking union, disparity in tax and accounting regimes, no single regulator or set of banking rules, complexities in structuring to meet regulatory capital and resolution requirements, differing national implementation of directives and national protectionism. That said, the fragmentation of the landscape at present is likely to mean that competition approvals are less challenging, given the essentially national markets in which banks currently play.
While some national governments are encouraging bank M&A by divesting holdings in banks that received assistance during the financial crisis – for example the Hellenic Financial Stability Board sold down a 22 per cent. stake in the National Bank of Greece last year – there have been both political and regulatory challenges. For further details on the global merger control environment, see the latest edition of Panoramic: Merger Control, prepared by Freshfields in partnership with Law Business Research.[4]
Recent examples of high-profile large-scale M&A activity in the sector include BBVA’s bid for Banco Sabadell, the acquisition of a stake in Commerzbank and offer for Banco BPM by UniCredit. These transactions indicate a purported effort on the part of forward-looking executives to effect such consolidation and commentators suggested that this was proof of dealmaking among European banks being back on the cards. However, all of these transactions have been subject to intense scrutiny.
BBVA’s €11bn hostile bid for Sabadell has been submitted to a phase 2 review by the CNMC, Spain’s antitrust regulator, and has received opposition from the Spanish government on the basis of concerns with job security and from an antitrust perspective. When UniCredit disclosed a 9 per cent. stake in Commerzbank, before further disclosing derivatives trade which potentially increases its stake to 21 per cent., it set in motion one of the biggest potential M&A transactions in the banking sector since the financial crisis. While CEO Andrea Orcel publicly mulls a potential full Commerzbank takeover (which he anticipates UniCredit will make a decision on “within a year”), the transaction has received significant backlash from several prominent members of the German government, including German Chancellor Olaf Scholz. UniCredit is clearly hoping to be at the forefront of M&A in the sector, including in its home Italian market, highlighted most recently by its £10.1bn offer for Banco BPM.
Looking forward
Although the expected market-wide M&A rebound has not yet come to fruition, growth in deal volume, particularly in the financial services sector, is expected to continue in 2025.
As noted above, although national transactional activity, or at least the acquiring of stakes, between banks looks to continue in the UK and Europe, cross-border mergers will largely depend on the outcome of recent proposed deals in this space. If BBVA or UniCredit are successful with their respective potential acquisitions then we may yet see a European institution emerge with the ability to challenge globally – any banks considering an acquisition on a similar scale will be watching the next steps of European governments and regulators closely.
Freshfields
Freshfields has been at the forefront of advising financial institutions on bank M&A this year. For more information, please see our coverage listed below:
Freshfields advises UBS on its acquisition of Credit Suisse | Freshfields
[1] S&P Global, “The World’s largest banks by assets, 2024” (30 April 2024)
[2] ECB, (08 October 2024), Interview with Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, conducted by Miha Jenko
[3] ECB’s Lagarde supports bank mergers as UniCredit-Commerzbank talks intensify | Euronews
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