Europe’s Banks Need to Merge, Get Bigger

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With interest rates remaining very low — and no end to the low-rate regime in sight — banks of all sizes are having a hard time making a profit. John Cryan, chairman and CEO of Deutsche Bank A.G. (NYSE: DB), said Wednesday morning that more mergers, including cross-border mergers, are needed to keep the banking sector afloat.

That may be true, but Cryan also said that Deutsche Bank will not be involved in takeovers “any time soon” despite some opinion among analysts that the bank should find a partner once it has stabilized its operations. Deutsche Bank, and other big European banks, face mounting pressure to get their balance sheets under control, leaving them little room to mount a major acquisition.

The irony is that the continent needs fewer banks. A Bloomberg report earlier this month noted that Italy has 64 branch banks per 100,000 population and Spain has 70, double the ratio in either Japan or the United States. But consolidation, at least within countries, could help clean up the banks’ balance sheets.

Deutsche Bank just barely made the cut in last month’s European stress tests, and its U.S. subsidiary failed the U.S. stress tests. The bank’s European capital fell to less than 3% in the stressed scenario, hardly a confidence-inspiring number.

Recapitalizing Europe’s banks is difficult, though, and remains the elephant in the room, largely because Germany has refused to share the risks that would follow the recapitalization of banks from Greece and Portugal.

Europe’s banks, according to Cryan, are more secure than they were before the financial crisis, with more capital and less risk on their balance sheets. The cost has been lower profits.

The solution: fewer, but bigger, European banks to increase the survivors’ pricing power in the low interest rate environment. How to get there is the problem.