Credit Suisse: Drafting a European Champion –

Any new strategy won’t quell the merger rumors for long. takes a look at the possible scenarios and makes a surprising discovery.

Every M&A specialist wants it. European banking supervisors want it. And even investors would welcome it, particularly when they look at the share prices of the key players. Talk is seemingly rife about a potential large-scale European banking merger.
Credit Suisse is one of the banks constantly being named – notwithstanding its expected strategy update on Thursday, which prompted its share to rise 5 percent at the start of the week.
Credit Suisse and Deutsche Bank are frequently seen as possible merger candidates, although some seem to favor Italy’s Unicredit in the German bank’s place instead.
Making the Big Leagues
But what would such mergers even look like? If you combine their balance sheets, it quickly becomes clear that a merger between the Swiss and German bank would create a serious European banking competitor.
Its merged balance sheet size would be well above $2.3 trillion, making it one of the top 10 banks in the world according to Standard & Poor’s rankings.
That would even it up with France’s BNP Paribas and Crédit Agricole and put it just behind HSBC and J.P. Morgan. The merged entity would definitely be something the market would take seriously.
Italian Solution
If Credit Suisse were to merge with Unicredit, it would only become 14th or 15th in the world. That would mean it would have to be content with being the size of a Barclays, a Santander or a Société Générale. The largest U.S. and Asian banks would be well out of reach.
Although the Deutsche Bank merger would create a gigantic market competitor, the $116 billion in the combined entity’s equity looks pretty marginal at best. A merger with Unicredit would result in roughly the same level of equity – even though the balance sheet of that combined bank would be significantly smaller.
Looking at some other parameters might provide other clues. The combined Swiss and German entity would have about 20 percent fewer loans than the Swiss-Italian one although client deposits for both would be about the same.
The structure of the liability side of the balance sheet would look very different, with Credit Suisse and Deutsche Bank having a far higher level of financial market commitments and obligations than the Swiss-Italian one.
Other Parameters
Market capitalization and the number of employees are other important parameters. Currently, all three have roughly the same market cap, with Credit Suisse’s being around $28 billion, just above Deutsche Bank’s $26 billion but below Unicredit $29 billion. In comparison to competitors, that is low.
BNP Paribas has a market cap of about $84 billion, HSBC has $122 billion and J.P. Morgan weighs in at a hefty $510 billion. Barclays on the other hand only has a market cap of $46 billion and Societe Generale lies at $29 billion.
The number of employees provides interesting contrasts. Credit Suisse has about 48,000 full-time equivalents, Deutsche Bank 85,000 and Unicredit 82,000. Both modeled merged entities would result in having about 130,000 in total headcount each.
J.P. Morgan has about 255,000 employees, HSBC 235,000 and BNP Paribas 193,000 while Barclays and Société Générale have about 120,00 and 150,000 staff respectively.
Regional Differences
Looking at the business segments also provides a differentiated picture. Credit Suisse divvies up its businesses into a Swiss universal bank, international wealth management, the Asia Pacific region, and the investment bank.
Deutsche Bank segments include a corporate-, investment- and a private bank as well as asset management. Unicredit separated its activities into the regions of Italy, Germany, Austria, Central and Eastern Europe as well as an investment banking segment.
Investment Banking
All merger candidates have capital markets activities. Credit Suisse’s investment banking revenues are about the same as Deutsche Bank’s while Unicredit’s business is significantly smaller in revenue terms while it still makes just about as much as Credit Suisse does in profit. All of them seem to offer roughly the same range of services.
When you look at all three, there is little regional overlap. Credit Suisse is strong in Switzerland and the Americas. Deutsche Bank has historically been focused on Germany and in the U.K. and Americas when it comes to investment banking. Unicredit focuses on Italy, Germany, Central and Eastern Europe.
Weak Combination
A merger between Credit Suisse and Deutsche Bank would result in a significantly larger entity but one that would need significantly more equity, as regulators would likely require it – although it would be a good regional fit.
Deutsche Bank’s head Christian Sewing sees a merger as being feasible, but he sees his institution as taking an active role and is probably unwilling to take the back seat in any transaction. Credit Suisse probably thinks the same way.
Deutsche Bank’s cost-income ratio is currently at about 90 percent, which means that the integration process following a merger would be very difficult and one that Credit Suisse is not likely to willingly put up with for that long.
Andrea Orcel Very Open

Unicredit’s cost-income ratio has been at about 50 percent for years, which is much closer to Credit Suisse’s 80 percent. Unicredit chief Andrea Orcel, UBS’s former head of the Investment Bank, recently called off negotiations over the takeover of Italy’s problem child Monte dei Paschi, which gives him some room.
He has been very open to mergers, according to the «Financial Times» (behind paywall), although they have to generate value for shareholders.
That is probably why there won’t be a merger anytime soon. The risks are too large when you consider that the merged entity will not make the top ranks worldwide and that it would spend years hampered by a difficult integration process.

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