FINANCIALS: UCG Buys 9% of CBK; Beware Being Short Smaller European Banks

Unicredit (UCGIM: Baa3/BBB-/BBB-) has bought 9% of Commerzbank (CMZB: Baa2 pos/BBB), possibly as a prelude to full takeover. UCG’s interest had been well rumoured following CEO Orcel’s repeated comments about openness to M&A. We can see UCG spreads widening marginally (this is only a 2.3% deal in isolation) and bid speculation tightening CBK’s spreads, along with other potential European banking targets (such as BCP, smaller Italians).

• Unicredit announced it has bought c.9% of Commerzbank, having bought 4.49% from the German state’s c.16% holding, alongside “market activity” for the remainder. UCG says it is supportive of CBK’s board and will engage to “explore value creating opportunities”. UCG mgmt states that this deal meets its “strict financial parameters”.
• UCG says this will only hit its CET1 ratio by 15bp. The current value of the stake is around EUR1.34bn so, against UCG’s market cap of EUR59bn, this is only a 2.3% deal for the Italian bank. However, making an outright bid would likely become a 25-30% deal, so very material.
• UCG bought HVB, the German regional bank with a CEE network, nearly 20yrs ago and has made a success (broadly) over time. This deal is, therefore, complementary, but would increase UCG’s exposure to German retail banking, a famously low return market and at a point when returns are about to be pressured by falling interest rates.
• In terms of credit spreads, UCG spreads should move wider, not only on execution risk generally but also on buying lower-returning assets than its core business and the value transfer likely to CBK equity holders, even though UCG’s rating is one notch weaker than CBK.  CBK should, correspondingly tighten and this does highlight the risk of being short any of the smaller European banks, we feel.