Major UK banks should be ready to join in a round of consolidation in European banking. The British economy is stagnant, competition from challenger app-based banks is intense, and the government is determined to tax businesses out of existence. A major takeover of a European bank would put each of them on the global stage, and if they got it right, could power their profits for a decade or more.
In the sector's biggest takeover offer for more than a decade, Italy's UniCredit tabled a $40 billion offer for Germany's Commerzbank, which it has been stalking for years. What happens next remains to be seen. It is very hard to win a hostile contest for a eurozone financial institution, and certainly one as large as Commerzbank.
UK banks should join a unified European financial system
A round of consolidation within European banking is inevitable over the next year. The EU has finally realised it needs a unified financial system if it is to improve its competitiveness. But hold on - surely the major British banks should be taking part in that process? True, Britain is no longer part of the EU. But it is still part of the wider European economy, even if officials in Brussels would prefer that it wasn't. If a major eurozone bank is up for sale, then they should be looking at it very seriously.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Firstly, it is the natural space for expansion. There is not much scope for takeovers within the British banking market, while the US is a very hard market to crack and Asia offers limited opportunities. By contrast, all the major European finance markets are geographically close. A takeover or merger would offer huge scope for cost cutting, while the leaner management that UK banks have perfected would mean it would not be hard to make their branches and loan books more profitable. Continental banks are not very efficient, so it should be possible to squeeze out higher profits.
Latest Videos FromMoneyWeek
Secondly, UK banks can afford it. All the major British banks have been racking up huge profits. Lloyds made £6.7 billion last year, a 12% increase on a year earlier; Barclays made more than £9 billion, a 13% rise; while NatWest, now finally fully private again, made £7.7 billion, an increase of more than 24%.
Commerzbank only has a value of £31 billion despite all the takeover speculation, and even Deutsche Bank is only worth slightly over £40 billion. There are plenty of banks across the eurozone that are now relatively small compared to the British lenders. They can be bought without taking on huge levels of debt, especially if a deal can be financed partly in shares.
Finally, the chance won't come again. The German banking industry has been struggling along with the rest of the German economy, but it will probably recover over the next decade if the country manages to restructure its industrial base. If you don't take over one of its major banks now, then soon it will be too late. You won't be able to afford them, and they won't be for sale anyway.
Likewise, the French economy has slumped, but it may revive, and so may the rest of the eurozone. Looking back, Switzerland's Credit Suisse was a major opportunity when it was rescued by UBS in 2023. The UK banks missed out that time around. It would be a shame to miss out all over again. This is a once-in-a-generation opportunity to double or more in size.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
