ALEX BRUMMER: Beware of financial institution mergers – they’ll go horribly fallacious

Europe’s banking scene is very different from 2007 when Royal Bank of Scotland, aided and abetted by Santander and Fortis, gate-crashed a proposed £69billion merger of Barclays with Dutch lender ABN Amro.

Barclays boss John Varley, married to a scion of one of the bank’s founding families, even conceded that the headquarters would be canal-side in Amsterdam.

RBS’s intervention led to all the parties involved being bailed out by governments, with RBS, later renamed NatWest, only escaping the clutches of the Treasury on May 31 this year. The road back for European banking has been perilous.

Paradoxically, Wall Street banks, at the core of the Great Financial Crisis (GFC), bounced back to health bigger and stronger. Among Europe’s challengers, only HSBC, with its stranglehold on Hong Kong, is in the same league as JP Morgan and Bank of America. 

The repairs to Europe’s fractured banking system are now more-or-less done and the industry is throwing off huge volumes of cash. Consultants Oliver Wyman note that European banks have returned $300billion to shareholders since 2022. The cash generated by a restored sector is fostering an M&A boom, with $36billion of deals this year and dizzying reports of new alliances.

Andrea Orcel, the investment banker behind the disastrous RBS-ABN Amro transaction, is leading the charge. Now boss of Italy’s UniCredit, he is in hot pursuit of Commerzbank in Germany. He has been also trying to buy Banco BPM in Italy in a deal which has been on and off.

Shopping around: Authorities in Frankfurt and Brussels are gung-ho for cross-border mergers, but national authorities are more circumspect

The last bout of European bank mergers was brought to a nasty end by the GFC. The subsequent 2010 euro crisis, which began in Greece, saw the banking systems in the Club Med: Greece, Italy and Spain, struggling with bad debts.

There is now a recognition that Europe’s fractured banking system is no match for the bigger US beasts. If the euro is to establish itself as an alternate reserve currency to the dollar, cross-border bank mergers and capital markets must be established.

Christine Lagarde, president of the ECB, is leading the charge. Britain is on the sidelines of European debate. Authorities in Frankfurt and Brussels are gung-ho for cross-border mergers, but national authorities are more circumspect. 

BBVA’s multi-pronged effort at buying Sabadell in Catalonia has shaken Britain’s TSB, spun-out from Lloyds after the financial crisis, out of the tree. There is no end of speculation about the fate of TSB and for that matter Santander in the UK.

The latter was pieced together by Santander chairman Ana Botin out of the remains of consumer banks Abbey National, Alliance & Leicester and Bradford & Bingley in the detritus of the financial crisis. NatWest reportedly wanted to buy Santander but the price was lofty. Santander itself is in search of more scale by buying TSB.

Meanwhile in the UK, challenger banks are consolidating with the supermarket banks now owned by High Street lenders.

The owner of RBS spin-off Shawbrook is looking at a deal with Metro Bank. NatWest chief executive Paul Thwaite, freed of government interference, makes no secret of its ambition to bolt on more customers. But NatWest has taken itself out of the TSB race.

The former RBS learnt the hard way that bank bids can go horribly wrong. Investing in customer loyalty and financing growth for UK start-ups would be a smarter deployment of surplus resources.