The European banking system has long been viewed as the “troublemaker” for European integration and growth. Every time someone compares America to Europe, the negative argument for solid European growth came from its weak banking system.
Indeed, troubles exist. Ever since the 2008-2009 Great Financial Crisis, the European banking system has not recovered. It could not – the sovereign crisis started in 2012, and financial markets clobbered banks and sent risk to the moon. The United States did its homeward and recapitalized the banks – something that in Europe did not happen.
Moreover, there is a huge difference between the two banking systems. In Europe, for instance, the system is so fragmented that in some countries, there are local banks that no one heard of – but local people.
Enters ECB. One of the struggles of the ECB and the targets for the future is to let the industry consolidate. However, that comes at a high, unpopular price.
Advantages and Disadvantages of Letting M&As in the Sector Happening
At the start of this month, the Pfizer-BioNTech announcement of an efficient COVID-19 vaccine sent the stock markets higher. One of the largest jumps happened in the European banking sector. How come?
The sector was viewed as extremely weak in the case of an economic recession. Therefore, short sellers increased their bets that a prolonged crisis and recession will bring the sector to its knees. As such, on the positive vaccine news, the sector bounced off the lows as the valuations were extremely low.
A few days later, one of the major Spanish banks, BBVA, announced the sale of its U.S. operations. This is one bank that suffered both during the Great Financial Crisis and in the years that followed. For instance, it has huge exposure to the Turkish banking system, known as unstable and with plenty of risks.
What is interesting is that the buyer of the U.S. operations paid 1.3 times the BBVA U.S. assets on a price-to-book value. However, most European banks trade at price-to-book well below 1x. Hence, the move sparked another leg higher in the sector as, suddenly, other investors see it as undervalued.
Needless to say, the BBVA shares jumped again. Fast forward a few more days, and the BBVA announces a merger with another Spanish bank – Sabadell. Great news from the European banking system, as it consolidates some more. Great news for the ECB too. Bad news for employees, as under the new institution, some 2,000 branches will be closed.
As always, reforming a sector (or a business) comes at high, unpopular costs. This is why proper reforms take a long time.