UniCredit’s Orcel Targets Europe’s Banking Borders with Commerzbank Investment, According to Reuters

Title: UniCredit’s Ambitious Plan for Cross-Border Mergers Faces Political Hurdles

By John O’Donnell

FRANKFURT – For many years, Andrea Orcel has been the go-to adviser for CEOs involved in significant banking deals. Now, as the CEO of UniCredit, the Italian banker is taking on a formidable challenge: overcoming Europe’s entrenched political resistance to cross-border mergers.

Orcel expressed his merger ambitions recently when UniCredit became the second-largest shareholder in Commerzbank, following the German government, which retained its stake from a previous banking crisis. This initiative, code-named ‘Flash’ after Orcel’s dog, has sparked intense debate in Berlin, drawing opposition from labor unions and prompting defensive strategies from Germany’s second-largest bank.

The UniCredit head aims to initiate discussions on a merger that he believes would create a more formidable competitor in Germany. This push comes amid growing calls for European banks to enhance their competitiveness against larger U.S. and Asian institutions.

However, significant obstacles remain. Cross-border banking deals in Europe have historically been hampered by extended periods of low profitability, leaving many banks too weak to pursue ambitious mergers. Additionally, regulatory frameworks and a political preference for homegrown institutions have further complicated the landscape.

One advantage for UniCredit is its recent financial turnaround, giving it the capability to pursue bold strategic initiatives that its competitors may not be able to consider.

The challenge now lies in navigating national politics. Karel Lannoo of the Centre for European Policy Studies notes that many European nations have overpriced banking services due to their being dominated by a few local banks. He pointed out that Germany’s reaction to UniCredit’s interest in Commerzbank illustrates a broader resistance to shifts in this landscape, especially coming from an Italian bank.

Some German officials have expressed frustration over what they perceived as a stealthy approach by UniCredit, which quietly acquired its stake. UniCredit, however, insists it has acted transparently, especially at a time when Germany’s coalition government is facing its own challenges ahead of impending national elections.

While the Italian government views UniCredit’s ambition to create a substantial European banking entity favorably—as long as major operations remain based in Italy—official backing has not been forthcoming.

A merger between UniCredit and Commerzbank would mark the largest cross-border banking deal in Europe since the financial crisis. Orcel is banking on UniCredit’s existing connections in Germany, particularly through its ownership of HVB, to persuade politicians of the merits of a combined entity.

Orcel has articulated a vision of creating banks capable of supporting diverse industries and enhancing Europe’s economic clout relative to the U.S. and China. This sentiment aligns with ongoing discussions in Brussels regarding the need for a more competitive European banking sector.

In a recent report, former European Central Bank president Mario Draghi called on the EU to dismantle the barriers impeding cross-border banking initiatives.

Orcel, who previously walked away from a deal to acquire troubled Monte dei Paschi, has shown he can be resolute in the face of challenges. UniCredit’s legal actions against the ECB regarding its orders to scale back in Russia also demonstrate his commitment to pushing boundaries.

In light of opposition in Germany, Orcel has ruled out a hostile takeover approach, opting for a more measured strategy. If successful, this deal could reshape perceptions of cross-border banking throughout Europe.

Should a bid arise for Italy’s Monte dei Paschi, experts suggest it would be nearly impossible given the current political climate. The dynamics change, however, if UniCredit proceeds with ambitions to acquire a German bank, prompting a reevaluation of possibilities across the region.

Orcel’s next hurdle is securing approval from the ECB for a significant stake in Commerzbank. Analysts believe such approval is likely, given the appetite for cross-border mergers.

While the European financial services market is still evolving, many believe that mergers like that of UniCredit and Commerzbank could help realize its full potential.

There remain questions regarding the feasibility of such a deal, with some experts emphasizing that mergers should ideally be complementary, voluntary, and often focused within the same country. Expanding across borders without significant overlap can complicate matters considerably.