BBVA’s Deal Appetite Signals Major Shakeup at European Banks

Article content

(Bloomberg) — The animal spirits appear to be returning to European banking.

Banco Bilbao Vizcaya Argentaria SA’s announcement on Tuesday that it would begin talks to acquire Banco Sabadell SA is further evidence that long-awaited consolidation in the region’s banking market is accelerating.

Article content

While a merger wouldn’t be the transformative, cross-border merger that many bankers and regulators have wanted, it would create a lender with more than €1 trillion ($1.1 trillion) in assets and a market value close to the current one Banco Santander SA create valuation: 72 billion euros. This would give BBVA a profitable business in the UK and allow them to expand their Mexican business.

Article content

An unusual confluence of factors has occurred. After nearly two years of rate hikes, many lenders have made record profits that they are now unable to put to good use – and buybacks aren’t always the solution. As the focus now turns to when interest rates will fall again, executives are looking for ways to diversify.

“As we inch closer to the first possible interest rate cuts from the European Central Bank and the Bank of England, consolidation across the industry will be top of mind,” said Federated Hermes analyst Filippo Maria Alloatti.

European lenders have seen a 25% rise in consensus 2024 net profit since the start of 2022, driven by rising interest rates, according to Bloomberg Intelligence. Record profits, including among Spanish and Italian retail groups that have benefited from economic growth in southern Europe, are beginning to upset established patterns.

According to the European Commission, Spain, Portugal and Greece are expected to be among the best-performing economies in the euro area this year, supported by booming exports, tourism and lower energy prices.

Article content

Article content

Read more: Sun, sea and exports give southern Europe reason to be complacent

Carlos Torres, chairman of BBVA, now joins Andrea Orcel, CEO of UniCredit, and others who are openly looking for deals. Orcels Bank bought the Greek government’s 9 percent stake in Alpha Bank in October and announced a merger with Romania. The Italian has made no secret of the fact that he has billions of euros in free capital that needs to be put to use.

Read more: Orcel’s money machine has $10 billion to reshape European banking

French lenders are also on the rise, where the eye for deals goes beyond one-to-one mergers in banking. Earlier this month, BNP Paribas SA agreed to buy Fosun International Ltd’s stake in Belgian insurer Ageas for around 730 million euros. Société Générale SA sold two units in a matter of days this month, helping halt the slide in its share price.

In the wake of the financial crisis a decade and a half ago, Spain saw rapid banking concentration. According to credit ratings firm S&P, lenders in the country have reduced the number of branches by almost two-thirds and the number of employees by over 40% since the end of 2008. CaixaBank acquired Bankia in 2020 and Unicaja bought Liberbank the same year, while Santander acquired smaller lender Banco Popular in 2017.

Article content

Europe’s banking leaders have for years stressed the need for transformative deals to stand out in a fragmented market dotted with thousands of smaller, regional lenders. The lack of uniform deposit protection across the European Union and cumbersome regulations have hampered such cross-border efforts.

The so-called “banking union” project has been stalled for years due to a lack of political will – but there are even some signs of change. Earlier this month, European lawmakers approved the first step of a plan to bundle insurance for bank depositors.

What Bloomberg Intelligence says:

The combined entity would have a domestic mortgage market share not too far behind CaixaBank. The size of BBVA’s offering and TSB’s strategic options may be deciding factors.

— Lento Tang, BI banking analyst

Article content