Rising interest rates could trigger new round of European bank consolidation – bankers
Banco Santander’s decision to make dealmaker CEO seen as prelude to new macro scenario
End of Draghi’s mandate, rise of fintech also seen contributing tailwinds
European banks could once again return to M&A after a dearth of activity as interest rates start to rise, said two bankers and a lawyer familiar with the sector.
Although low interest rates tend to help M&A in non-financial sectors, by making financing cheaper, they tend suppress activity among banks, said one of the bankers. As interest rates gradually rise, banks will benefit where others sectors falter, this banker added.
Economists predict rates to rise around the time that ECB president Mario Draghi is due to leave his post on 21 October 2019.
Banco Santander’s [BME:SAN] decision to hire a dealmaker as its new CEO earlier this week should be read as an indication that the banking sector could return to M&A as interest rates rise, said the lawyer and the second banker. The Spanish bank appointed UBS’s [SWX: UBSG] head of investment banking, Andrea Orcel, as its new CEO.
The Italian banker, who has worked with Santander for 20 years, will be able to help the bank identify and execute opportunistic deals as rising interest rates transform its market, said the second banker.
Orcel is due to begin his new role at some point of the first quarter of next year, said a person familiar with the situation, adding that it is too early to say his exact start date. It would be a mistake to assume that he has been hired for any specific deal, this person added.
Santander transformed itself into the largest bank in the euro-zone through a series of deals under the stewardship of its late executive chairman Emilio Botin between 1986 and 2014. His daughter, Ana Patricia Botin, has been executive chair since his death. She has been much less aggressive with M&A than her father as the bank has dealt with ultra-low interest rates.
This cautious approach is fairly typical of the sector as a whole. Financial services is the only sector in Europe not to have returned to pre-crash levels of M&A, this news service reported earlier this month.
Between 2006 and 2008, European financial deals had a value of EUR 607.9bn across 1,592 deals. From 2016 to date, just EUR 221.1bn has been traded across 1,251 deals.
The European Central Bank (ECB) became the first major central bank to move to negative interest rates in June 2014, three months before the death of the senior Botin. Instead of receiving money on deposits, banks must pay to keep their money with the central bank. The idea is to incentivize lending and investment.
The ECB’s main refinancing rate stands at zero, while its deposit rate is minus 0.4%.
Draghi famously said that he would do “whatever it takes” to save the euro in the midst of a crisis of confidence in 2012.
Potential opportunities
Uncertainty over Draghi’s successor at the ECB, combined with the threat to the industry from fintech and the opportunities yielded by rising interest rates, means that Santander and its peers will need to be more active than they have been recently, the first lawyer said. A seasoned investment banker like Orcel will be able to move fast if necessary, this lawyer said.
There were a number of mega-deals ahead of the credit crunch in 2007 and 2008. Most notably, was a raid on Dutch lender ABN Amro [EPA:ABN], led by Royal Bank of Scotland [LON:RBS], which led to deep losses for shareholders and taxpayers.
Santander was a member of that consortium, with Orcel as one of its main advisers. Santander kept ABN Amro’s Brazilian business, which is now a profit centre, but traded away its Italian unit, as reported.
Italian bank Unicredit [BIT:UCG] was also an enthusiastic player in the pre-crash boom. It has been rumoured to be discussing a mega-deal with SociétéGénérale [EPA:GLE], although politiicans have played down the idea. Talk of mergers is also afoot elsewhere in Europe, with Barclays [LON:BARC] and Standard Chartered [LON:STAN] reportedly mulling a deal in the UK, along with Deutsche Bank [ETR:DBK] and Commerzbank [LON:CZB] in Germany.
Santander is Europe’s second-largest bank by market capitalization and the largest in the euro-zone. Its shares are worth EUR 72.47bn.
Brazil is the bank’s biggest market, with 26% of its group profits. This is followed by the UK (16%) and its home market of Spain (15%). Its consumer finance business generates 13%. Other large markets include Mexico (7%), Chile (6%), Portugal (5%), the US and Argentina (4% each). It is also present in Poland and a handful of smaller markets.
A spokesperson for Santander declined to comment.