Analysis-UniCredit’s Orcel takes aim at Europe’s banking borders with Commerzbank bet By Reuters

By John O’Donnell

FRANKFURT (Reuters) – For decades, Andrea Orcel has been the “rainmaker” to whom chief executives turned for advice on the big deals that reshaped the banking landscape.

Now, as CEO of UniCredit, the Italian has set himself his biggest test yet — breaking Europe’s deep-rooted political resistance to cross-border mergers.

Orcel signaled his merger ambitions last week when his Italian bank swooped in for Commerzbank (ETR:), becoming its second-largest shareholder after the German government, which holds a stake after a crisis-era bailout.

UniCredit’s move, dubbed “Flash” after Ursel’s dog, has sparked a frenzied search for direction in Berlin, opposition from trade unions and a defensive strategy from Germany’s second-largest listed bank.

Orsel now wants to start talks on a merger that he says would “create a much stronger competitor” in Germany. His move follows years of calls for Europe to improve its banks’ competitiveness against larger rivals in the United States and Asia.

And faces great obstacles.

Cross-border banking in Europe has been held back by factors including years of poor profitability that have left lenders too weak to try, and regulatory barriers to moving resources freely across borders that have been reinforced by politicians’ preference for local “champions.”

UniCredit has overcome one obstacle: unlike its competitors, it has the financial muscle to pull off a bold merger after generating healthy profits.

But national politics will be the hard part.

“Most European countries charge exorbitant prices for banking services because they are in the hands of a few local banks,” said Karl Lanou of the Centre for European Policy Studies.

“The German reaction to UniCredit’s interest in Commerzbank shows Germany’s resistance to changing this situation,” Lano said. “The Italians are coming to teach the Germans a lesson in the free market, and the Germans don’t like that.”

Some members of the German government were upset by what they saw as a covert move by UniCredit, which built up its 9% stake overnight, a source told Reuters.

UniCredit said it was transparent in its move, which comes at a sensitive time in Germany, as its coalition government, one of the most unpopular in modern history, prepares for national elections next year.

Recent gains by the far right and far left are putting pressure on the three-party coalition, and in particular the smallest member, the liberal Free Democratic Party, which runs the finance ministry.

Meanwhile, Rome looks favorably on Milan-based UniCredit’s efforts to build a major European bank as long as it keeps its central functions in Italy, sources close to the matter said.

However, Italy is keeping its distance from UniCredit, and there are no moves to support UniCredit’s venture, a senior official told Reuters.

“Blind of the countryside”

UniCredit’s merger with Commerzbank would be the biggest European cross-border banking deal since the global financial crisis.

Orcel is betting on UniCredit’s existing links with Germany – it already owns the German bank HVB – and its ambition to form a joint group that will impress politicians.

“Europe needs banks that can support every industry and grow Europe so that we become an economic bloc that can withstand the United States and China,” Orcel told Bloomberg last week.

This reflects a long-standing message from officials in Brussels, Europe’s political meeting point.

Last week, former European Central Bank President Mario Draghi, in a comprehensive report on how to make Europe more competitive, urged the EU to address obstacles to cross-border banking.

Orcel, who pulled out of a preliminary deal to buy troubled Monte dei Paschi in 2021, upending then-Italian Prime Minister Draghi’s efforts to resolve the bank’s long-running problems, could be a hawk.

UniCredit has filed a lawsuit against its supervisor, the European Central Bank, which ordered it to withdraw from Russia.

Facing significant resistance in Germany, Orsel ruled out a hostile bid on Thursday, softening his approach.

If he succeeds, the deal could reshape thinking elsewhere in Europe.

“Imagine if someone today made an offer to buy the government’s stake in Monte dei Paschi, they would never be able to do it,” said Sebastiano Piro, chief investment officer at Algepress.

“If BNP Paribas makes a bid, it would be simply impossible. They would prefer it to stay domestic. But if UniCredit buys a German bank, all options would be on the table,” said Perrot, whose hedge fund invests in UniCredit and Commerzbank and supports a tie-up between them.

“work in progress”

Orcel’s next test is getting the European Central Bank’s approval to buy up to 30% of Commerzbank. Analysts say the ECB is unlikely to stand in the way, given the years of calls for such deals.

“The single European market in financial services is a work in progress but mergers like UniCredit and Commerzbank would help make it a reality,” said Nicolas Veron of the Bruegel think tank in Brussels.

Some are wondering whether Orcel should try to strike a deal.

Mergers and acquisitions “should be complementary; they should be voluntary and often, often, they should be in the same country,” said Patrick Lemmens, a fund manager at Robeco who owns shares in UniCredit.

“The moment you cross the border and there’s a little bit of overlap, it becomes more difficult.”