UniCredit's Orcel Targets European Banking Borders with Commerzbank Bet

UniCredit CEO Andrea Orcel is strategically investing in Commerzbank to challenge and redefine the boundaries of European banking. This move highlights his ambition to strengthen UniCredit's presence in the competitive financial landscape of Europe. By targeting Commerzbank, Orcel aims to capitalize on growth opportunities and foster consolidation within the sector, potentially reshaping the future dynamics of banking across the continent.

‍FRANKFURT, Sept 19 (Reuters) – For many years, Andrea Orcel was the go-to advisor for CEOs looking to make significant deals that transformed the banking sector. Now, as CEO of UniCredit, he faces his biggest challenge yet: overcoming Europe's deep-rooted political barriers to cross-border mergers.

Orcel expressed his merger ambitions last week when UniCredit acquired a significant stake in Commerzbank, becoming its second-largest shareholder after the German government, which retains a stake following a crisis-era rescue.

This move, code-named 'Flash' after Orcel's dog, has ignited a flurry of activity in Berlin, stirring opposition from labor unions and prompting a defensive response from Germany's second-largest listed bank. Orcel aims to initiate discussions about a merger, which he believes would create a much stronger competitor in Germany. This strategy follows years of calls to enhance the competitiveness of European banks against larger rivals from the U.S. and Asia.

However, he faces significant obstacles. Cross-border banking deals in Europe have been hampered by years of low profitability, leaving banks too fragile to pursue such ventures. Additionally, regulatory hurdles and a preference among politicians for homegrown champions have further complicated matters.

UniCredit's turnaround has alleviated one challenge; unlike its competitors, the bank now possesses the financial strength needed for an ambitious merger after achieving substantial profits. Yet, navigating the political landscape remains a complex task.

Karel Lannoo from the Centre for European Policy Studies noted that most European countries face overpriced banking services due to a concentration of power among a few local banks. He pointed out that Germany's reaction to UniCredit's interest in Commerzbank highlights resistance to change. "The Italians are seen as trying to teach the Germans about the free market, and that’s not well-received," he said.

Some German officials have expressed frustration over what they perceived as UniCredit's stealthy acquisition of a 9% stake overnight. UniCredit has stated that it acted transparently, particularly during a sensitive time in Germany, where the coalition government is among the least popular in recent history and is gearing up for national elections next year.

The rise of far-right and far-left parties is putting pressure on the ruling coalition, particularly affecting the smallest party, the liberal FDP, which oversees the finance ministry. Meanwhile, the Italian government is supportive of UniCredit's ambition to create a major European bank, provided that it maintains its central functions in Italy, according to sources.

Nevertheless, Italy is keeping its distance, with no intention of formally backing UniCredit's initiative, as stated by a senior official. A potential UniCredit-Commerzbank merger would mark the largest cross-border banking deal in Europe since the global financial crisis.

Orcel believes that UniCredit's existing connections in Germany, including its ownership of German lender HVB, along with its ambition for a combined entity, will sway political opinion. "Europe needs banks that can support various industries and contribute to our economic strength against the U.S. and China," Orcel told Bloomberg last week, echoing sentiments from Brussels officials.

In a recent report aimed at boosting European competitiveness, former European Central Bank president Mario Draghi emphasized the need to address obstacles to cross-border banking. Orcel, known for his uncompromising approach, previously withdrew from an agreement to acquire troubled Monte dei Paschi in 2021, disrupting efforts by then-Prime Minister Draghi to resolve the bank's long-standing issues.

Faced with considerable resistance in Germany, Orcel has ruled out a hostile takeover, softening his strategy. If successful, this deal could shift perspectives throughout Europe.

Sebastiano Pirro, Chief Investment Officer at Algebris, noted, "If someone were to bid for the government stake in Monte dei Paschi, it would be impossible. However, if UniCredit were to acquire a German bank, it would open up numerous possibilities."

Orcel’s next challenge is securing ECB approval to purchase up to 30% of Commerzbank. Analysts believe the ECB is unlikely to oppose such a deal, given the ongoing calls for cross-border mergers.

"The European single market for financial services is still developing, but mergers like UniCredit and Commerzbank could help make it a reality," said Nicolas Veron from the Brussels think tank Bruegel.

Some observers question whether Orcel should pursue such a deal, arguing that mergers and acquisitions should be complementary and voluntary, often requiring companies to be based in the same country. "Cross-border transactions with little overlap become increasingly difficult," warned Patrick Lemmens, fund manager at Robeco, who holds shares in UniCredit.

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Source: Reuters‍