UniCredit and Commerzbank were on the cusp of merger talks this year before the Ukraine war scotched a deal that could have kickstarted European banking’s long-awaited cross-border consolidation wave. 

Three people with direct knowledge of the matter told the Financial Times that in early 2022 UniCredit’s chief executive Andrea Orcel planned informal discussions about a potential combination of the Italian lender’s German HypoVereinsbank subsidiary with his opposite number at Commerzbank, Manfred Knof.

The transaction would have formed Germany’s second largest lender with €785bn in assets, 1,000 branches and 48,000 employees. 

Analysts have long seen a tie-up between UniCredit and Commerzbank as one of the most attractive combinations in European banking as there is relatively little regional overlap between the lenders’ German operations.

HypoVereinsbank, which Milan-based UniCredit acquired in 2005 and is more profitable than its German peer, has a strong local footprint in Bavaria and the Hamburg area, while Commerzbank is present across Germany.

The deal, which UniCredit previously explored in 2019 as an alternative to Commerzbank’s subsequently-aborted tie-up with Deutsche Bank, would have been the first big cross-border deal in Europe’s fragmented banking sector.

Orcel arranged a meeting in early 2022 in Germany to discuss the merger with Knof, according to people with knowledge of the discussions. But before details could be thrashed out by the CEOs, Moscow had invaded Ukraine. 

Manfred Knof joined Commmerzbank in January 2021 as part of a last-ditch effort to restore profitability © Pavel Becker

UniCredit instead decided it needed to manage its exposure to Russia before embarking on any large dealmaking. UniCredit is one of a handful of western banks with large operations in Russia.

Orcel has said the group is considering exiting the country and has revealed it stands to lose €5.3bn on the business in a worst case scenario. It has already begun swapping credit portfolios with local lenders.

The prospect of higher interest rates had buoyed European lenders’ shares until the war started, with Commerzbank disclosing a week before the invasion that higher interest rates in Europe would deliver a billion-euro windfall to its bottom line by 2024.

But concerns over the economic fallout of the war, and potential disruptions of Russian energy supplies, have sent share prices downwards since late February — UniCredit has lost more than a third and Commerzbank fell by 26 percent.

US investors like Capital Group pulled out of European banks over the past three months, selling large stakes in Commerzbank, Deutsche Bank and Barclays. The US fund manager was UniCredit’s largest shareholder, but last week cut its stake from 6.8 per cent to below 4 per cent.

The fragmented nature of Europe’s banking market has been considered a handicap for its lenders, which have lost ground to US rivals on profitability and market share.

EU regulators and policymakers have urged banks to consider combining to improve economies of scale – but no large cross-border deals have taken place with banks complaining that EU capital requirements and differing regulatory regimes make mergers too punishing.

A tie-up between the two banks is still considered the most likely large deal, in part because Commerzbank has the German state as a 15 per cent shareholder after a €23bn bailout in 2008 and 2009, and is seen by analysts as sub-scale.

After a shareholder rebellion that followed years of failures to cut Commerzbank’s bloated cost base, Knof was parachuted in January last year as part of a last-ditch effort to restore profitability. In the first quarter of 2022, the bank’s net profit more than doubled to €298mn, following a better-than-expected performance in 2021.

UniCredit initially approached German officials about a tie-up with Commerzbank in 2017 and prepared a bid three years ago, according to people with knowledge of the moves.

Under the original plans, UniCredit would have amassed a sizeable stake in Commerzbank and merged it with HypoVereinsbank.The combined entity would have been based in Germany while UniCredit would maintain its headquarters and listing in Milan. Commerzbank would retain a free float of shares listed on the Frankfurt stock exchange.

Commerzbank’s market capitalisation has since shrunk from €9bn at the time to €7.8bn, while UniCredit’s stock market value is €21bn, down a third from three years ago.

UniCredit and Commerzbank declined to comment.

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