Unicredit

Reports from Germany would appear to suggest that Italian bank Unicredit is waiting to pounce on Commerzbank in the event that the merger with Deutsche Bank fails to pan out. This is the sort of deal that would make more sense than trying to merge two struggling German banks, however it is still likely to face a significant number of obstacles.

Firstly it’s based on the current talks between Deutsche Bank and Commerzbank breaking down, but even if that does happen, which seems likely given trade union opposition, as well as the prospect of having to raise extra capital, they will also have to convince the German government who own a 15% stake in the German lender.

One advantage Unicredit does have is that, despite the weaknesses in the Italian banking system, at least Unicredit has been one of the few Italian banks in recent years that has taken steps to strengthen its financial position.

In its last set of numbers the bank posted quarterly net profits of €1.73bn, though this was helped by a tax gain of €887m.

In 2017 the bank raised €13bn to boost its capital ratios, while also setting aside €8.1bn in provisions for bad loans. At the time this was more than its entire market capitalisation as the bank managed to stave off financial disaster at the fourth time of asking, having raised around €6bn in 2012. 

With a market cap now in excess of €25bn and already owning German retail bank Hypovereinsbank it would appear that bank management now appear confident enough in the strength of the restructured bank to up their exposure to the German retail banking sector.

Commerzbank is also the cheaper of the two German banks with a €9bn market cap and does appear to be further along the restructuring path, however it is still struggling on the profitability front, though in its latest Q4 numbers it did show a 51% rise in net profit to €113m, though it scaled back its projections for revenues for 2020.

Even without the concerns about the Italian banking sector this would still be a risky bet given how low margin, and overbanked the German banking sector already is. If the merger were to be approved the combined branch network would total nearly 1,500 branches across Germany, though it would probably still be smaller than Deutsche, along with its Postbank brand. In comparison here in the UK it is estimated that Lloyds has about 1,200, while NatWest has around 1,000, though these numbers are based on 2017 estimates.

Unicredit also owns a stake in Turkey’s Yapi Kredit which may well end up costing it a few more billion euros if the geopolitical situation in Turkey goes south, though it should be containable.

The bigger question is whether this is a wise move given the concerns about the Italian banking sector, the low profitability of the German banking sector, and the prospect that interest rates are likely to remain anchored to the floor for years to come.

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