European politics, regulators present a ‘significant hurdle’ to bank M&A — analysts react

The week is kicking off with buzz around the potential for a big merger among European banks, following a report that Italy’s UniCredit is considering a merger with France’s Société Générale.

UniCredit hasn’t made a formal approach, and officials at both banks are in early-stage talks, said a Financial Times report on Sunday. SocGen on Monday denied any board discussions about a possible marriage with the Italian bank, and UniCredit declined to comment.

Some analysts poured a bit of cold water on the potential M&A action.

“The political and regulatory backdrop remains a significant hurdle to deliver an attractive deal,” said Jefferies analysts Benjie Creelan-Sandford and Marco Nicolai in a note Monday.

Nationalist and anti-establishment politicians have just started governing in Rome, presenting a unique challenge to any French-Italian deal. On the regulatory front, the Jefferies team sees possible trouble in capital requirements and the lack of a fully-fledged banking union in the European Union.

One other challenge is that UniCredit already might have its hands full. The lender is “still only half-way through its current three-year restructuring plan,” wrote Creelan-Sandford and Nicolai. “In that context, we don’t believe the current management team would contemplate a substantial acquisition near-term.”

MainFirst analyst Matthew Clark also didn’t sound impressed by the merger chatter.

“Post-crisis, investors have shown a consistent preference for simplicity in bank investment cases whereas a large, cross-border merger inherently adds complexity,” he wrote in a note Monday.

“We struggle to see the necessary conditions to be in place for a deal to occur before 2020 at the earliest,” Clark said, adding that UniCredit and SocGen are both attractive on their own and he has an outperform rating on each bank.

But the Jefferies analysts also see reasons for the merger, noting that this exact tie-up has been a frequent topic of speculation over the past 15 years.

“There are potential competitive advantages from building a larger pan-European franchise,” and SocGen is a business UniCredit CEO Jean Pierre Mustier knows well, because Mustier worked at the French bank for many years, said the Jefferies analysts, who have a buy rating on UniCredit’s stock.

Kepler analysts struck an upbeat tone on the M&A buzz, raising their rating on SocGen’s shares on Monday.

“Société Générale is now at play, in our view, and this warrants an upgrade of our rating from ‘Hold’ to ‘Buy’,” they wrote in a note, according to a Reuters report.

A downbeat take on the deal came from Politico Europe’s chief economics correspondent.

“Both banks have a few issues to resolve on their own, before they can think about anything like this,” wrote Pierre Briançon on Twitter. The merger also might be doomed by egos and politics, the Politico correspondent added in another tweet.

Société Générale SA’s stock was trading 1.7% higher Monday following the news, while UniCredit SpA’s shares were up 0.6%.