ECB lowers capital requirements bar for eurozone bank mergers

Clifford Chance’s local partner is advising Saudi Arabia’s biggest bank in a merger predicted to spur others in the region – as the European Central Bank announces plans to lower the bar for EU bank mergers.

National Commercial Bank and Samba Financial Group announced their proposed merger on 25 June. The two banks have a common key stakeholder, Saudi Arabia’s Public Investment Fund, chaired by crown prince Mohammed bin Salman.

Clifford Chance’s local partner AS&H is advising NCB, while Allen & Overy’s partner firm Khoshaim & Associates is counsel to Samba. Morgan Stanley is acting as Samba’s financial advisor, while JP Morgan is advising NCB.

The merger will require approval from the Saudi Arabian Monetary Authority, Capital Market Authority and General Authority for Competition.

The new entity will hold 30% of the kingdom’s banking assets, double that of its next nearest challenger, and become the third-largest bank in the Gulf Cooperation Council. Ratings agency Standard & Poors has predicted NCB’s competitors may be driven to pursue mergers of their own.

It quoted Sara Boutros, a senior analyst at Cairo-based financial services group CI Capital, as predicting the Saudi government would be pushing for further consolidation in the years to come. “Corporate-oriented banks will look to merge with rivals in order to achieve the scale that will enable them to compete,” she said.

ECB encouraging EU mergers

While Saudi Arabia’s government directly encouraged the NCB-Samba merger, the European Central Bank (ECB) is also pushing the EU banking sector towards consolidation after Deutsche and Commerzbank scrapped plans last year to create the eurozone’s second-largest bank.

The ECB said it would be revising its approach to merged banks capital requirements in a consultation paper published on 1 July.

Instead of automatically imposing higher capital requirements on the merged bank, the ECB said it would take an average of the capital requirements of both entities as a base point, which could then be “adjusted upwards or downwards on a case-by-case assessment.”

It said increases could occur if a combined entity’s risk profile showed “insufficient improvement”, but mergers could bring about lower levels where they generate an “effective improvement in the resilience of the business model.”

The ECB also says in the paper that it will “recognise, in principle” the concept of “badwill” – which allows buyers to book a profit if they buy a target for less than net asset value –when looking at mergers from a capital accounting standpoint, expecting it to be used to “increase the sustainability of the business model of the combined entity”.

In the lead-up to its aborted merger with Commerzbank last year, Deutsche reportedly told its shareholders it was relying on ECB officials to recognise the use of bad will in the transaction, which could have accounted for over €10 billion.

During the early communication phase of any merger talks, the ECB also says that involved parties must present “key characteristics” of the proposed business combination. They are expected to provide a “robust, credible and informative group-wide integration plan” for a preliminary assessment.

But Dirk Bliesener, a partner at Hengeler Mueller, says that the ECB’s request for early communication of merger talks could potentially hamper the consolidation efforts themselves.

“You can’t have meetings between CEOs of listed banks discussing concrete terms without disclosing this to the public, so disclosures could kick in at an early stage. There may not be a moment you can speak solely with the regulator about a deal,” he said.

“This is necessary for transparency reasons, but it can be a stumbling block as this can create market speculation and political pressures, in turn having an effect on share prices and the valuation of the institution itself,” added Bliesener.

ECB board member Édouard Fernandez-Bollo has said the central bank’s role is unchanged. “It remains true that our role is neither to push for consolidation nor to stand in its way. We also do not favour one given business model over another,” he wrote in an official blog post.

“Our prudential mandate is not to assess whether consolidation efforts are beneficial,” he added.

However, Allen & Overy partner Kate Sumpter says the guidance should be examined in the context of a “fragmented” EU banking system that has lagged behind its peers since the last crisis.

“The release of this guidance clearly suggests consolidation is needed. European bank balance sheets are in the main far less robust than those of their US counterparts, and with the level of NPL exposures and the wider effect of the pandemic on the economy, we will likely see European bank failures from next year onwards,” she said.

Andreas Steck, a senior partner at Linklaters in Frankfurt, also tells GBRR that the guidance points to an acknowledgement of the market needing consolidation, but stresses that in the given uncertain environment this would "likely be joint ventures in certain business areas rather than strategic transformational mergers."

The ECB will accept comments on the consultation paper until 1 October.

 

NCB-Samba merger

Counsel to National Commercial Bank

  • Abuhimed al-Sheikh & al-Hagbani (in association with Clifford Chance)

 

Financial advisor to National Commercial Bank

  • JP Morgan Saudi Arabia

 

Counsel to Samba Financial Group

  • Khoshaim & Associates

 

Financial advisor to Samba Financial Group

  • Morgan Stanley Saudi Arabia

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