Joining forces

May 21st 2007
From Economist.com

Two big Italian banks agree to get together

WHAT lies behind the rapidly arranged deal whereby UniCredit, one of Italy’s largest banks, will snaffle up Capitalia, a domestic rival? The near indecent haste of the dealmaking has no doubt put some noses out of joint. Some interested foreigners will be disappointed at missing out on the chance to grab a decent-sized institution themselves. They may also grumble that Italy is attempting the creation of a bank big enough to repel cross-border raiders. Some may even hear echoes of Antonio Fazio, the governor of the Bank of Italy until 2005, who tried to manage domestic banking consolidation in order to keep out foreigners.

In fact the €22 billion ($30 billion) deal to create one of Italy’s biggest banks, announced on Sunday May 20th, has much more to do with pan-European uncertainty caused by attempts by rival British banks to take over ABN AMRO, a vast Dutch bank. That shows that even the mightiest are attractive targets. Britain’s Barclays, which has offered €63 billion, and a consortium led by Royal Bank of Scotland, are circling the Dutch bank. Both would break it up to varying degrees. It is almost certainly not only in Italy that mid-sized banks are getting the jitters.

In any case, it would be wrong to moan that Italy’s new deal is evidence that cross-border consolidation in Europe is under threat. It is true that UniCredit turned to a domestic deal after its efforts to approach France’s Société Générale were rebuffed by that country’s regulators. But UniCredit still has an obvious interest in expanding across Europe, and it will be bolstered by its greater heft. It may yet return to court SocGen and says it plans to continue expanding in Eastern Europe.

As for Italy, there is plenty of evidence that foreigners are not being kept out. The current central bank chief, Mario Draghi, does favour the creation of a $100 billion Italian banking superpower. But since taking over from Mr Fazio nearly 18 months ago he has allowed a couple of sizeable foreign incursions into Italy’s banking market: BNP Paribas bought Banca Nazionale del Lavoro and ABN AMRO bought Banca Antonveneta. He has also overseen a huge merger between Banca Intesa and Sanpaolo IMI.

UniCredit’s move is partly a rejoinder to this tie-up. By buying Capitalia it will raise its share of Italy’s domestic banking market to 16%, nearly matching Intesa Sanpaolo’s 17%. And although UniCredit has lagged in Italy it has built up significant operations in other European countries, including the purchase of Germany’s HVB Group in 2005, cross-border traffic of a sort that pleased Mr Fazio. 

While Mr Draghi has overseen Italy’s big banks getting bigger, smaller banks have been getting together too. Many of Italy’s 700 banking houses are almost impossible to buy or they are too small for outsiders to bother about. But banche popolari, mutual banks that control 40% of the retail sector, and others have begun to join forces in response to the wave of mergers among larger lenders. Furthermore, Mr Draghi is considering changes to the law to make it easier for poplari to be taken over. So bigger Italian banks and outsiders will be presented with more appetising targets.

Most of Europe’s leading central bank chiefs want to protect their banking champions. Those in the euro area have seen their power to control monetary policy lost to the European Central Bank and worry that banking regulation will go the same way. Charlie McCreevy, the European Union's single-market commissioner, is not slow to reprimand undue interference. In 18 months new legislation will back up his words and pave the way for more hostile cross-border activity.