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European banking union would unleash a spree of sector mergers, claim analysts

Commerzbank and Deutsche Bank signs
Speculation has swirled over a number of possible tie-ups, such as ailing German lenders Commerzbank and Deutsche Bank Credit: HAYOUNG JEON/EPA-EFE/REX 

A wave of deals among Europe’s battered lenders would be unleashed by a region-wide banking union finally being created, experts have predicted.

The revival of the stalled banking reforms could remove some of the key blockages to a spree of mergers that many see as the solution to the sector’s woes, analysts at Swiss bank UBS said.

The prospect of a banking union moved a step closer last week after Olaf Scholz, Germany’s finance minister, signalled concessions from Berlin and urged the rest of Europe to “deepen and complete” the proposals. 

Jason Napier, UBS analyst, said that certain roadblocks are holding back much-needed consolidation in Europe’s banking industry, such as regulatory uncertainty. A banking union “could materially change this picture,” he said. “We have long argued that consolidation is one of the answers to an overbanked market facing peak revenues if ECB rates remain negative to 2025/26.”

Europe’s banks have floundered since the financial crisis, lagging well behind Wall Street rivals. The Euro Stoxx Bank index, which tracks shares in the eurozone’s industry, has plunged almost 60pc in the last 10 years.

“Take two minutes to merge any two Eurozone banks on your own assumptions and it’s easy to see improved returns and attractive resulting valuations,” Mr Napier said. “Over time, we think banking union and consolidation are a near certainty for a sector under really significant pressure.”

Speculation has swirled over a number of possible tie-ups, such as ailing German lenders Deutsche Bank and Commerzbank, which held unsuccessful merger talks earlier this year.

A single Europe-wide deposit protection scheme is seen as one of the key hurdles to a banking union. Mr Scholz signalled this week that Berlin could end its opposition to the region-wide fund to protect depositors in the event of a bank’s collapse. 

He said the impasse “has to end” but a German government spokesperson said that a deposit insurance scheme had not been formally discussed. 

Oxford Economics economist Daniela Ordonez said Mr Scholz’s comments were “a positive move after seven years of deadlock” but warned a “successful end to the talks is not guaranteed” given a lack of support from Italy and the ruling CDU in Germany. Rome has warned that capital requirements forced on its lenders in a banking union would actually damage the competitiveness of the region’s industry.

Despite signs of opposition, Pierre Moscovici, the European Commissioner for Economic and Financial Affairs, Taxation and Customs, said Mr Scholz’s comments were a “breakthrough” in the debate.