Large-Scale Bank Mergers Shift From Unthinkable To Feasible

Bank mergers, once deemed unfeasible post-2008 crisis, are now reconsidered. UBS's CEO, Sergio Ermotti, could reshape this narrative by potentially integrating Credit Suisse into UBS, proving that large-scale bank consolidation can be both safe and profitable.

Historically, major bank mergers were marred by painful failures, epitomized by the colossal USD 100 billion ABN Amro breakup in 2007. This event, involving Royal Bank of Scotland, Banco Santander, and Belgium's Fortis, led to severe repercussions, contributing to the collapse of consortium members and cautioning bank CEOs against risky acquisitions. Regulators reinforced this hesitance, imposing stringent rules on complex, large banks that would require even more capital in case of mergers.

However, Credit Suisse's recent downfall and subsequent bailout by UBS challenge this conventional wisdom. Swiss regulators watched as Credit Suisse faced repeated crises, ultimately losing investor and customer trust. This experience suggests that well-capitalised yet undervalued banks could swiftly lose favor, prompting a reevaluation of the desirability of earlier, more orderly mergers.

This shift in perspective may influence supervisors overseeing undervalued European banks like Société Générale and Barclays. While these banks aren't currently in trouble, pessimistic investor sentiment about their future prospects signals potential vulnerability. A strategic acquisition by a more profitable counterpart could preempt challenges akin to Credit Suisse's situation.

UBS's Ermotti has set a promising precedent by planning substantial cost cuts, equivalent to a quarter of the combined adjusted total costs of both banks in 2022. These savings, valued at USD 76 billion before accounting for one-off expenses, are close to UBS's market value, showcasing the potential financial gains of such mergers.

While replicating UBS's favorable terms may not be feasible, the relatively low valuations of Société Générale and Barclays make them attractive targets. Société Générale's valuation at one-third of forecast tangible book value for 2024 could appeal to local rival BNP Paribas or UniCredit. Barclays, trading at two-fifths of expected book value, might attract Santander, enabling cost synergies in Britain and strengthening its presence on Wall Street.