Goldman Sachs Says EU Bank M&A Rationale Is Rising With Profits

The rationale for mergers and acquisitions among European banks is rising even in the face of hurdles to cross-border tie ups, according to one of the region’s top financials deal-makers.

“The last two years have been phenomenal in terms of how profitability has maintained at comparably high levels,” Dirk Lievens, who co-chairs financial institutions coverage for Europe at Goldman Sachs Group Inc., said in an interview. “The key fundamental question for everybody at this point in time is: We are generating the capital — how can we deploy it most productively?”

The European banking industry has seen a raft of M&A attempts over the past few years including the latest wave taking place in Italy where two of the largest lenders are facing off in what could become a bidding war for Banca Monte dei Paschi di Siena SpA. Yet national interest and regulation are also putting the brakes on international transactions, including UniCredit SpA’s bid for Commerzbank AG.

Read More: Commerzbank CEO Warns of ‘Misery’ From Likely UniCredit Deadlock

Valuations are rising to the point where it makes more sense for boards to consider acquisitions rather than share buybacks, Lievens said. Lievens has worked on some of the biggest bank transactions in recent years.

“When one trades at 6 times earnings, it is easy to justify buying your own earnings rather than someone else’s,” he said. “When you trade closer to 10 times, that may not be the case.”

While Lievens alluded to progress in terms of the political will to let European banks consolidate, significant hurdles remain. “We see a favorable wind blowing from the supranational structures,” he said, citing the European Central Bank and the European Commission. Yet, “the reality on the ground on a national level shows a more nuanced picture,” he said.

Commerzbank has engaged Goldman Sachs to assist with its defense strategy against the UniCredit bid.

Read More: Commerzbank Prepares Defense for Possible UniCredit Takeover

The German bank has dismissed UniCredit SpA’s €37 billion ($43 billion) takeover offer as too low and urged investors to reject it. The German lender has also said it’s open to talks if UniCredit improves the offer and presents a strategy for the combined entity — though local politicians remain against the tie up.

Lievens said there is a simpler way to address some of the friction around cross-border banking mergers in the European Union, given that discussion of obstacles to deals often centers around the intractable problem of the lack of common deposit insurance.

“The harmonization of European takeover codes should be a priority,” he said. “At present, they differ greatly, which hampers consolidation and ultimately weakens Europe’s competitiveness.”