JP Mustier (Unicredit) held a short conference about “the future of banking in Europe” organised by the Centre of Financial Professions. He did not draw a rosy portrait of this future, pointing out that, for structural reasons, the sector was not in a position to exceed its 10-11% cost of equity.
According to him, US banks, which enjoy a structurally more profitable domestic market, have definitely won the battle of CIB (advisory and origination). As a consequence, EU banks have to focus on loans to households and SMEs as well as efficiency excellence through economies of scale at a pan-European level.
The opportunities of cross-border combinations at a group level remain pretty limited and regulatory- and politically-sensitive, so the privileged strategy remains “synthetic consolidation” that is to say the subcontracting of non-core activities to specialised pan-European players (Amundi, Kepler, etc.).
As regards M&A operations, we understand that the merger of equals is not the favoured route for UCG as it would likely concern a partner with a large CIB division which is seen as dead money.
Acquisitions of strong domestic retail brand names seem to be the option that corresponds the best with JP Mustier’s reading of the future of banking in Europe.
We note the JP Mustier’s exposé was focused on production, not distribution.
He rightly considers that Fintech companies are not in a position to disrupt incumbents and that GAFAs have no interests in becoming banks. It remains that such a focus diametrically differs from the speech of the likes of SAN or BBVA which are persuaded that the battle will concern distribution, which they expect to fall under the control of a handful of platforms.
As they make no secret that they want to be one of them, they implicitly indicate that distribution is the most valuable part of the value chain to them. We wonder if this means that JP Mustier’s objective is to focus UCG on distribution, a field where the group has not demonstrated particular excellence, or if he simply does not share the same view on the future of distribution.
Anyway, the group’s strategy looks pretty defensive, while it is generally said that the best defence is a good offence.
Founded in 2007, AlphaValue is the world’s leading provider of Independent European Equity and Credit Research. We provide comprehensive, unconflicted research-only (no execution, no corporate finance) coverage of c. 480 European mid and large cap stocks. We have an average of 46% of negative recommendations at any one time. Learn more at www.alphavalue.com