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European bank mergers are alive in Davos executives' dream deals

[LONDON] The big European bank consolidation is slowly taking shape, at least in the imagination of top finance executives meeting in Davos.

After a miserable year for European bank stocks that once again highlighted the widening gap with Wall Street competitors, some top bankers are openly calling for mergers. Behind the scenes, speculation about potential targets and acquirers is increasingly rampant, with a takeover of Commerzbank AG and an acquisition by BNP Paribas SA among favoured scenarios for the next 12 to 18 months, according to interviews with half a dozen decision makers.

"The one thing that matters in banking is size," UBS Group AG Chairman Axel Weber told Bloomberg in an interview Tuesday, pointing to how Wall Street firms have come back stronger from the financial crisis. "European banks need to reinvent themselves."

Banking chiefs at Davos had already urged European consolidation a year ago, but the lack of a single market for lenders has made cross-border deals difficult. Despite that obstacle, there appears to be a greater sense of urgency this year among executives.

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Topping the bankers' fantasy league: A deal between Deutsche Bank AG and Commerzbank. The two German lenders are both struggling to pull off multi-year turnaround plans, and while combining two sick lenders doesn't necessarily make a healthy champion, it's seen as the most likely option because it's a domestic solution. A deal would have the blessing of the German government and the Bundesbank, which isn't keen to transfer euros into another country, said one banker, who like the other asked not to be identified to speak freely.

If that deal doesn't work out, Commerzbank could become a target for banks including France's BNP Paribas or perhaps Spain's Banco Santander SA, the people said. Santander has a history of acquisitions, but after the bank dropped top dealmaker Andrea Orcel as its next CEO, speculation about a renewed push into takeovers may subside.

BNP Paribas is best placed bank among the European firms to acquire Commerzbank, because it has the backing of the French government, is in relatively good shape compared to peers and most of its misconduct issues are behind it, the executives said.

A more exotic scenario floated by one banker includes BNP Paribas snapping up Barclays Plc to create a European counterpart to the mighty JPMorgan Chase & Co. The British lender has been rapidly expanding in investment banking over the past few years despite recent resistance from an activist shareholder who has suggested the bank reduce its presence in selective trading activities.

The executives pointed out that Europe probably won't be able to rely on US firms to help with the consolidation. The six biggest investment banks there just posted their first US$100 billion year ever. They're enjoying the benefits of deregulation and have no desire to rock the boat by expanding into regions such as the UK, which is battling the uncertainties related to Brexit.

Even the Swiss banks may be reluctant to wade into the mess that is the European Union banking industry. Credit Suisse Group AG is just now coming out of its own restructuring and has vowed to distribute excess cash to shareholders. Mr Weber on Tuesday downplayed suggestions that UBS may come to the rescue of the Deutsche Bank.

"I don't think UBS will play a role in that," he said about consolidation. "Mergers tie you down for years."