The banking size does matter. From Frankfurt, the financial heart of Germany, the president of the European Central Bank (ECB), Mario Draghi, yesterday sent a message that should have raised the chair of more than one German banker.
In the midst of a debate over a possible merger between Deutsche Bank and Commerzbank, which would give rise to the largest entity in the country and with rumors of a possible entry into the board of Italian Unicredit as third in the race, the ECB's top executive invited the entities Europeans to lose their fear and to bet on mergers.
The European banking sector
"There is an excess of capacity, branches and also employees", warns Draghi
"Part of the structural weakness of banks in Europe is attributable to overcapacity in Europe. Not in the form of credit, but employees, branches ... There is a real need for consolidation in the banking sector, "said Draghi. In his opinion, "there is a relationship between economies of scale and the ability to carry out the investments that are needed to improve technology and be competitive, especially in certain business models."
The Italian banker defended his accommodative monetary policy. It has been criticized that the current interest rates, at very low levels -even in negative territory- have ended up hurting the results and balance sheets of the entities. But Draghi considers that they also have their share of responsibility.
The ECB recognizes that it will further study how to mitigate the impact of low rates
"Then banks complain about interest rates as a cause of their lack of profitability, but there are entities that have a ratio between costs and income of between 80% and 90%," he said.
In any case, for Draghi the objective of the mergers is "to make sure that the transaction is successful, which means that an entity is created that is stronger and capable of facing new challenges". And the greatest strength and size seems to be one of the necessary requirements if you want to be successful.
Javier Escuder, variable income analyst at Caixa d'Enginyers, recalls that the financial sector is the only one trading below book value, under pressure from the current interest rate environment, which reflects some long-term market concerns. "Unlike the United States, in Europe each country has its group of large banks and the mergers that Mario Draghi supports can be a solution," he says.
As far as monetary policy is concerned, yesterday the ECB did not move a file, neither in one direction nor in another. The stimulus withdrawal has not been talked about for months now, but the European Central Bank also did not send very specific signals on measures that could sustain the cycle in the face of the current economic slowdown, confirmed last Tuesday also by
More than a recession, the ECB admitted that there is a slower growth moment that will be extended throughout the year, due, according to the European institution, to geopolitical factors, the increase in protectionism and the weakness of emerging markets.
In this sense, the Italian sent a hint to US President Donald Trump, who threatens Europe with new tariffs. "First we have to see what happens because, as seen in the past, between words and deeds there is often a great chasm. But certainly the fact that these threats are aired with some frequency is undermining the general confidence, "he said.
At the press conference, Draghi, flanked by Vice President Luis de Guindos - who did not intervene - said the council meeting "was not operative." The rates were left at historical lows (0% / -0.4%). The ECB reiterated that it is expected to "remain at current levels at least until the end of 2019" (as he said in March). And it will not be Mario Draghi who is in charge of the future rise, since his term ends in October.
The only concession to the banking sector was that the ECB admitted that it is studying the start-up of a new round of liquidity auctions for banks (some loans at favorable terms), but it is still not clear what the conditions will be, linked to the evolution of the economy. "Anyway, it is a measure that does not directly affect, because it is conditioned to ask for credits", recalls Escuder.
Nor did the ECB give more details on how it intends to soften or mitigate the impact of negative interest rates on the banks' balance sheets. "We have shown that we have many instruments," he said.