What does the purchase of Commerzbank mean for UniCredit and German banks?

UniCreditStep to buy stake in German bank Commerzbank This raises questions about whether the long-awaited cross-border merger could spur more takeovers and shake up the European banking sector.

Last week, UniCredit announced it had acquired a 9% stake in Commerzbank, confirming that half of that stake was acquired from the government. Berlin has been a major shareholder in Commerzbank since it injected 18.2 billion euros ($20.2 billion) to rescue the lender during the financial crisis in 2008.

UniCredit has also expressed interest in a merger, with the Italian lender’s chief executive Andrea Orcel telling Bloomberg TV that “all options are on the table,” suggesting that it could do nothing else or buy on the open market. Commerzbank has been more cool to merger proposals.

Orcel said the Italian bank was able to buy the state’s 4.5% stake in Commerzbank because the government trusts UniCredit, Reuters reported on Thursday, citing local media. Asked if UniCredit would make an offer to buy out other investors in Commerzbank, the CEO told the Italian newspaper: “No, it would be an aggressive move.”

But analysts welcomed UniCredit's move, particularly because the tie-up could spur similar activity in Europe's banking sector – often seen as more fragmented than the US, where regulatory hurdles and legacy issues are obstacles to mega-deals.

So far, the market has responded positively to UniCredit’s move. Shares in Commerzbank jumped 20% on the day the UniCredit stake was announced. Shares in the German lender are up about 48% so far this year and added another 3% on Wednesday.

Investors value the geographic overlap between the two banks, consistency in financials and the assumption that the deal is “collaborative” in nature, UBS analysts led by Ignacio Cerezo said in a research note last week. According to UBS, the ball is now in Commerzbank’s court.

The potential merger “should theoretically have a limited impact on UniCredit’s capital allocation plans,” analysts at Berenberg said in a note last week. While there are “strategic advantages” to the deal, the immediate financial benefits for UniCredit could be modest, with the potential risks of a cross-border deal offsetting some of the benefits, they said.

David Benamo, chief investment officer at Axiom Alternative Investments, praised Orsel's decision to buy a stake in Commerzbank as a “great move” that made sense because of the increased German market share it would give UniCredit.

“Because Commerzbank failed to cover costs in Q2 (second quarter), its valuation is currently very low, so the moment when (Orsel) comes in is probably one of the best moments it could have,” Benamou told CNBC’s “Squawk Box Europe” last week.

Asked how close the acquisition was to happening in the near term, Benamou indicated it was possible, saying: “They will likely get there.”

UniCredit is already on its way to becoming a leading bank in Europe, said Arnaud Journois, senior vice president of European financial institutions ratings at Morningstar DBRS.

He told CNBC on Wednesday that there was a “double logic” behind UniCredit's move because it gives the Italian lender access to the German and Polish markets where Commerzbank currently operates.

“UniCredit has been very active over the past two years, making some targeted acquisitions… so this is the next logical step,” Journois said.

UniCredit continues to surprise markets with impressive quarterly earnings figures. It posted a profit of €8.6 billion last year (up 54% year-on-year) and delighted investors with share buybacks and dividends.

Analysts hope UniCredit’s move will encourage more cross-border consolidation. European officials have begun to make more comments about the need for bigger banks. French President Emmanuel Macron, for example, said in a May interview with Bloomberg that Europe’s banking sector needed more consolidation.

“European countries may be partners, but they are still competitors at times,” Journois told CNBC. “So, I know that from the EU’s perspective — the policymakers’ perspective — there is a desire for more unification. However, we think there are some hurdles that make that difficult, particularly on the regulatory side.”

A cross-border merger between UniCredit and Commerzbank would be more preferable than a domestic merger between Deutsche Bank and Commerzbank, said Rende Grube, head of the Hall Institute for Economic Research.

“The German banking structure is long overdue for consolidation,” Grupp told CNBC on Wednesday. “Basically, Germany still owns almost half of the banks in the eurozone, which is much larger than its share of GDP. So any consolidation would be welcome now.”

He noted that Commerzbank had always been a “top takeover candidate” in the German banking sector because most other banks in the country were savings banks that private institutions or cooperative banks could not take over, which also constituted difficult takeover targets.

Deutsche BankBank of Berlin, which was still seen as the main contender to take over Commerzbank after initial talks collapsed unexpectedly in 2019, is said to be preparing its own defensive strategy in the wake of the UniCredit stake.

Deutsche Bank is unlikely to make a strong rival bid for Commerzbank, said Filippo Allotti, head of finance at Federated Hermes.

At 13.5%, compared with a target of 13%, Deutsche Bank is “somewhat limited.” A 13% ratio is used to measure a lender’s financial strength. The German bank also has less excess capital than UniCredit and therefore “cannot afford” a takeover, Alloty said.

But Alloty suggested that Deutsche Bank should be brave and consider another target such as ABN Amro. The Dutch bank, which was also bailed out by the state during the 2008 financial crisis, has been the subject of speculation about a possible takeover.

“We were waiting for this. If they (UniCredit) succeed, other management teams will certainly look at this case,” Allotti said of the possibility of more mergers in the sector, noting that there was also room in Italy for local mergers.

Grupp admitted that UniCredit's CEO had made a “very bold move” that had surprised the German government and Commerzbank.

“But we may need a bold move to make any changes at all to the European banking system, which is long overdue,” he added.

In comments reported by Reuters, Commerzbank Chief Executive Manfred Knof told reporters on Monday that he would consider any proposals from UniCredit in line with the bank's commitments to its shareholders.

Knauf told the bank's supervisory board last week that he would not seek an extension to his contract, which runs until the end of 2025. German newspaper Handelsblatt reported that the board may be considering an early change of leadership.

Commerzbank’s supervisory board will meet next week to discuss the UniCredit stake, people familiar with the matter told CNBC on condition of anonymity. There are no plans to replace Knauf once that meeting takes place, the people said.

CNBC's Annette Weisbach, Silvia Amaro and Roxandra Iordache contributed to this report.