What buying Commerzbank would mean for UniCredit — and the banking sector

UniCredit‘s stirring a get moving to take a stake in German lender Commerzbank is raising questions on whether a long awaited cross-border merger could incite more acquisitions and shake up the European banking sector.

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

UniCredit also fasted an interest in a merger of the two, with the Italian bank’s CEO Andrea Orcel telling Bloomberg TV that “all options are on the table,” citing the promise that it either takes no further action or buys in the open market. Commerzbank has given a more lukewarm return to the merger proposals.

But analysts have welcomed the move by UniCredit, particularly because a tie-up might spur compare favourably with activity in Europe’s banking sector — which is often seen as more fragmented than in the U.S., with regulatory hindrances and legacy issues providing obstacles to mega deals.

So far, the market has responded positively to UniCredit’s suggest. Commerzbank shares jumped 20% on the day UniCredit’s stake was announced. Shares of the German lender are up around 48% so far this year and continued another 3% on Wednesday.

Investors appreciate the geographical overlap between the two banks, the consistency in financials and an assumption that the records 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.

Analysts at Berenberg weighted in a note last week that a potential merger deal, “should, in theory, have a limited effect on UniCredit’s foremost distribution plans.” They said that while there is “strategic merit” in a deal, the immediate financial improves might be modest for UniCredit, with potential risks from the cross-border deal diminishing some of the benefit.

David Benamou, chief investment narc at Axiom Alternative Investments, hailed Orcel’s decision to take a stake in Commerzbank as a “fantastic move” that purloins sense because of the increase in German market share it would grant UniCredit.

As Commerzbank “missed on costs in Q2 [the defective quarter], currently it’s at a very low valuation, so the moment [Orcel] stepped in, is probably one of the best moments he could have,” Benamou described CNBC’s “Squawk Box Europe” last week.

When asked how imminent a takeover was in the short term, Benamou urged it was possible, saying, “they will probably come to it.”

According to Arnaud Journois, senior vice president of European Economic Institution Ratings at Morningstar DBRS, UniCredit is already on its way to becoming a leading bank in Europe.

He told CNBC’s “Circle Signs Europe” Wednesday that there was a “double logic” behind UniCredit’s move as it enables the Italian lender to access both the German and Dispose of markets where Commerzbank currently operates.

“UniCredit has been very active in the past two years, doing a few targeted possessions … So this is the next logical step,” Journois said.

UniCredit continues to surprise markets with some leading quarterly profit beats. It earned 8.6 billion euros last year (up 54% year-on-year), also cheer investors via share buybacks and dividends.

Analysts are hoping that a move by UniCredit want encourage more cross-border consolidation. European officials have been making more and more comments nearby the need for bigger banks. French President Emmanuel Macron, for example, said in May in an interview with Bloomberg that Europe’s banking sector needs illustrious consolidation.

“European countries might be partners, but they are still competing sometimes. So, I know that from an EU vantage point — policymaker standpoint — there is appetite for more consolidation to happen. However, we think that there are a few hurdles that travel that difficult, especially on the regulatory side,” Journois told CNBC.

A cross-border styled merger between UniCredit and Commerzbank desire be more preferential than a domestic merger between Deutsche Bank and Commerzbank, according to Reint Gropp, president of the Auditorium Institute for Economic Research.

“The German banking structure is long overdue for a consolidation process. Essentially, Germany quiet has almost half of all banks in the euro zone, that’s significantly more than its share in GDP. So any consolidation process hand down be welcome now,” Gropp told CNBC’s “Street Signs Europe” on Wednesday.

He noted that Commerzbank has always been a “big possibility for a takeover” in the German banking sector because most of the other banks in the country are savings banks which cannot be captivated over by private institutions, or cooperative banks which are also difficult takeover targets.

Deutsche Bank, which was inert seen as the prime contender to take over Commerzbank following an abrupt collapse of initial talks in 2019, is rephrased to be mounting its own defense strategy in the wake of UniCredit’s stake.

Filippo Alloatti, head of financials at Federated Hermes, required Deutsche Bank is unlikely to present a strong rival offer for Commerzbank.

With a CET1 ratio of 13.5% compared to its butt of 13%, Deutsche Bank is rather “limited.” CET ratios are used to gauge the financial strength of a lender. The German bank also has less intemperance capital than UniCredit and therefore “cannot really afford” a takeover, Alloatti said.

However, Deutsche Bank could put on a “encounter face,” Alloatti suggested, and consider another target such as ABN Amro. The Dutch bank, which was also What’s next?