Commerzbank would boost UniCredit’s profits, but not without risks By Reuters

(Reuters) – UniCredit’s purchase of a 9 percent stake in Commerzbank (ETR: ) raised the prospect of a merger that had long been considered a natural option for the Italian lender, which entered the German market in 2005 by buying the Bavarian company HypoVereinsbank.

UniCredit in 2001 attempted a move on Commerzbank, which it abandoned just before the 9/11 attacks.

The Milan-based bank has been working on a possible bid in 2019, but has encountered political resistance. A push under current chief executive Andrea Orcel in 2022 went nowhere because of the conflict in Ukraine.

Germany represents approximately 20% of UniCredit’s net profit.

Here are some analysts’ views on the latest move:

UBS

If a full offer were to take place, Germany’s stake for UniCredit would rise to around 40% from 20%-25%.

UniCredit could finance at least part of a potential deal with cash without its core capital breaching the 13% threshold the bank wants to meet.

“We would expect some consideration of the rationale behind (i) the build-up of stake versus a larger initial investment and (ii) the risks of deploying additional capital in Germany at this difficult time…but our view initially on the deal is positive to the extent that it opens the door for UniCredit to use excess capital in an area it already operates and on attractive financial terms at first sight.”

BANK OF AMERICA

A deal would allow UniCredit to double its market share with German SMEs, cut costs and re-enter the Polish market.

“While in principle we believe such a development would be potentially win-win for all parties involved, the terms of the deal, size and nature of the transaction would come with some execution risk and possibly political/financial hurdles.”

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A simulation over the summer indicated that a deal would generate earnings per share (EPS) growth of more than 8% in 2027, assuming a 20% premium offer. Commerzbank’s share price decline since then implies higher EPS growth.

However, “we wonder why UniCredit has not launched a full takeover at this stage and what the timing might be, as this could lead to lower financial benefits.”

Citi notes that Germany is a less profitable market than Italy.

SIM EQUITY

Assuming UniCredit pays a 20-25% premium in a half-cash, half-stock offer, a merger that allowed Commerzbank to cut costs by 10% would boost earnings per share by more than 15%.

The combined entity would have a return on equity (ROTE) of over 16.5%, compared to around 8% for Commerzbank currently and UniCredit’s current ROTE of over 17%.

MEDIOBANCA SECURITIES

At a 20% premium, Commerzbank is “comfortably the most attractive option for UniCredit”, with 25% growth in earnings per share, 3.1 percentage points growth in core capital and growth of 1, 7 percentage points of ROTE.