Cross-border mergers in Europe
January 28, 2025
Topic of the week:
By Borja Fernandez de Vega
We move to the London summer of 2012, one day before the start of the Olympic Games. That July 26, for many economists and financial professionals, the president of the European Central Bank (ECB), Mario Draghi, managed to save the euro. Taking advantage of the prominence that such a sporting event always offers, the British organized a financial summit called the Global Investment Conference with the aim of attracting foreign money. That morning, the President of the ECB participated in a session entitled “How to manage global challenges” and it is in this appearance that Draghi famously said: “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”.
Mario Draghi had become President of the ECB a few months earlier in the midst of a financial crisis where sovereign debt, the banking system and the economic stability of the European Union were heavily affected. As a reminder, Spanish and Italian 10-year bonds reached interest rates above 7%. Draghi’s words, in that July appearance, managed to temporarily calm the markets. From that moment on, the European institution began to work on different monetary mechanisms to safeguard the common currency.
During his term of office until 2019, the Italian president expressed on many occasions the need for bank consolidation in the eurozone. Not only to create more profitable entities, but also more globally competitive ones. To achieve this goal, cross-border bank mergers are necessary, but since the beginning of the European financial crisis (and in general terms) this consolidation has been carried out without crossing borders. One of the main obstacles to this possible European banking union is the lack of a common Deposit Guarantee Fund (DGF), as these funds are currently organized at the national level. The European Commission has been working on this issue for more than a decade, but has not been able to agree on a system that pleases all member countries.
In recent years the banking sector has benefited from the high interest rates in Europe, achieving record results. Currently, the entities have significant capital, but with the prospect of interest rate reductions that would harm their business. These circumstances are conducive to a period of mergers and acquisitions in the sector. Currently, there are major potential bank mergers in Europe, such as the Spanish BBVA-Sabadell and the Italian UniCredit-BPM. In addition, Unicredit also initiated a shareholding increase in German bank Commerzbank in 2024.
The reduction in the number of companies in any sector always generates uncertainty due to the reduction in competition and the possible negative impact on the end customer. This is not the case in the European banking sector, which continues to be excessively fragmented and needs to continue working on the consolidation of entities to make them more competitive. These larger banks would benefit from economies of scale and greater capacity to invest in technology and digitalization. In this way, they would achieve an optimization of resources that would possibly result in a better service at a lower cost for customers. The increase in banking products and services of these “large entities” would reduce the risk of bankruptcy. And if these mergers were cross-border, a further reduction in risk would be achieved by an increase in regional diversification.
We are probably behind schedule, but if Europe does not want to be relegated to the background and compete with the world’s major companies, it must promote and facilitate cross-border mergers in certain strategic sectors, such as finance.
The beacon of the markets:
The positive tone was maintained in the main equity markets in a week in which macroeconomic data has not had a relevant weight, and in which the corporate results season has been the main reference for investors. In the United States, the S&P 500 closed at 6,101.22 points, scoring a rise of 1.74%, as well as marking the first annual high, leaving the bar at 6,127.91 points. The Nasdaq 100 gained more than 1.50% to end at 21,774.01 points. In Europe, the Euro Stoxx 50 ended at 5,219.25 points (also setting a new historical high at 5,260.35) and the Ibex at 11,982.60 points, i.e. +1.37% and +0.56% respectively.
Yesterday saw a notable increase in volatility, with European markets starting the day with falls of more than 1%, and with American futures anticipating very significant falls, especially in technology-related indices such as the Nasdaq, which pointed to falls of more than 4% at the close of this edition. The reason for these falls was derived from the presentation in China of DeepSeek, a company that would be achieving relevant results in artificial intelligence, but without having to resort to the latest generation of microchips (the United States prohibits access to advanced chips in China), something that has made the investment community wonder whether the enormous expenditure in which US technology companies have embarked can be justified.
As far as the bond markets are concerned, the trend is not entirely clear-cut. After a start to the week in which buying led the market after several weeks of selling, we saw caution finally return to investors causing the accumulated gains to disappear, and finally the yields generated by government bonds rose, albeit very slightly. The 10-year Treasury was up a minimum of 1 bps compared to 5 bps for the Bund and 2 bps for the Spanish Bono, each of them ending with a yield of 4.63% for the Treasury, 2.55% for the Bund and 3.19% for the Bono.
In the alternative markets, gold continued to show strength, as many investors are still concerned about the decisions of the new US government, with gold acting as a safe haven. During the week it gained +1.10% to end the week at 2,778.9 USD/Onz, a new all-time high at the close of the session. On the other hand, the price of oil was favored by two fundamental factors: on the one hand, the truce between Israel and Hamas significantly reduced tension in the Middle East, and on the other hand, Trump’s intervention in Davos calling for a reduction in the price of crude oil to the producing states, together with the measures already taken to favor US production. These events have led to a correction in the price of Brent to 78.43 USD/b, i.e. a fall of 2.92% per week.
At the macroeconomic level, of the scarce publications, we should highlight two data in Europe: i) the ZEW Euro zone investment confidence index, which surprised the market positively at +18 versus an estimate of +16.9, which would have meant a slight correction, and ii) the PMIs, especially the manufacturing PMI, which rose to 46.1 versus the expected 45.6, at the aggregate level exceeding the 50-point barrier for the first time in months (expansion zone). In the United States, we highlight: i) the PMIs followed the same trend as in Europe, but the manufacturing PMI managed to exceed the 50 level, ii) better data from the housing market, and iii) slightly deteriorating data from the University of Michigan on expectations.
The current week will bring us much more activity at the macroeconomic level and therefore we could see an increase in volatility in the financial markets. On top of everything else we will have the central bank meetings. The FED will leave its interest rates unchanged (not expected until the end of the first half of the year or the beginning of the second half) given the strength of its economy, the labor market and prices that could rebound in the coming months. For its part, the ECB will lower its deposit facility rate by 25 bps to 2.75%. In addition, in Europe we will know the GDP data (provisional) and the unemployment rate and in the United States we will highlight the consumer confidence data from The Conference Board, the GDP for the fourth quarter of 2024 (provisional) and the PCE data, key data for the FED.
The earnings season is progressing favorably; so far 78 S&P 500 companies have reported earnings growth of 8.3% (7.5% is the analysts’ forecast). So far 81% of the companies have positively surprised the market, while less than 13% have disappointed.
The sentence:
And we bid farewell with the following quote from Winston Churchill, British politician, military man, writer and statesman, Prime Minister of the United Kingdom from 1940 to 1945, during World War II: “Courage is what it takes to stand up and speak; but it is also what it takes to sit down and listen.”
Summary of the performance of major financial assets (1/27/2025)
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This document has been prepared by Portocolom Agencia de Valores S.A. for the purpose of providing general information at the date of issue of the report and is subject to change without notice. Portocolom Agencia de Valores S.A. assumes no obligation to communicate such changes or to update the contents of this document. Neither this document nor its contents constitute an offer, invitation or solicitation to purchase or subscribe for securities or other instruments or to make or cancel investments, nor may they form the basis of any contract, commitment or decision of any kind.
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