November 22, 2024
It’s a good thing that European dealmaking is back on the table
 #NewsMarket

It’s a good thing that European dealmaking is back on the table #NewsMarket

CashNews.co

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The writer is chair of BBVA

Mergers and acquisitions are firmly back into the spotlight in Europe and for good reason. Apart from BBVA’s offer to the shareholders of Banco Sabadell, Italy’s UniCredit has built a stake in German lender Commerzbank.

This activity comes amid rising awareness of the urgent challenge outlined in both Mario Draghi’s landmark report on the future of European competitiveness and another by Enrico Letta on Europe’s single market — that the continent urgently needs larger companies to compete globally in crucial sectors to sustain economic growth and generate the jobs and resources to underpin Europe’s social model.

Few sectors illustrate this imperative more clearly than the financial sector, which has been transformed by a digital revolution. In 2017, BBVA attracted just 7 per cent of new customers through digital channels. Today it is more than two-thirds, with 80 per cent of sales occurring digitally. Banks’ growth no longer relies on bricks and mortar, but on the ability to innovate online. The pace of disruption will only accelerate, spearheaded by the dizzying advances of AI and other technologies.

The implications for my industry are clear. The sector is becoming increasingly competitive with digital challengers attracted by lower barriers to entry and the minimal cost for users to switch accounts. At the same time, banks must make larger investments in technology to ensure continuous service, and to withstand, respond and recover from digital disruptions and cyber attacks — as required by regulation in the EU from next January. To stay competitive, banks must spread these technology costs over a larger customer base.

Yet Europe has fallen behind. Despite the region’s economic size, no bank from the EU currently ranks in the top 25 globally by market capitalisation. Instead, the most valuable banks are based in the US and China (comparable markets in GDP size) and even in smaller economies such as India, Japan, Canada and Australia. In addition, competition is coming from outside the traditional banking industry, including from behemoth tech players. None of these giant disrupters are European.

While we await the completion of the planned banking union and the capital markets union in the EU, Europe needs larger banks now. Size matters because of the strong relationship between scale, banking profitability, the capacity to invest in technology and innovation, and the ability to finance the real economy to support GDP growth. Larger, stronger and more efficient banks are more likely to provide capital to companies and major projects, or to invest in managing complex risks in an uncertain, multipolar world. Not only can larger lenders expand bank finance across borders, but they can more actively contribute to developing crucial alternative funding sources, such as markets for securitisation, equities and bond finance.

As European Commission President Ursula von der Leyen made clear recently, Europe needs to support companies scaling up in global markets to meet ambitious decarbonisation goals. Bigger balance sheets are the only way to effectively fund the more than €700bn that the commission estimates will be required annually for Europe to meet its long-term climate targets. At the same time, companies also need to invest in emerging technologies that will determine whether Europe becomes a leader, or remains a laggard, in the digital revolution.

So what stands in the way? As banks make their M&A moves, authorities must expedite and remove barriers to internal consolidation and cross-border deals. This is the only way to scale up the continent’s lenders and their financial firepower at pace.

To be clear, advocating for easier tie-ups and the elimination of national obstacles is not a call for loosening competition rules or reducing regulation. Preserving effective competition is essential. Indeed, consolidation among traditional banks should actually enhance competition by strengthening lenders’ ability to compete globally, and to provide more financing and better services to clients.

In the end, it comes down to choices. If we want European companies to generate the jobs and resources needed to underpin the region’s social model, then Europe needs banks with the scale and capabilities to fund them. The alternative is lower investment, an erosion of productivity, and ultimately, declining living standards as Europe loses ground to other regions. Therefore, the most pressing regulatory risk no longer is that banks might be “too big to fail” but “too small to deliver” — lacking the scale needed to compete and power Europe’s future. Will we act swiftly to seize this opportunity or will we fall further behind?