Bank M&A in Europe has picked up steam in recent months, but ultra-low valuations have prompted wrangling between buyers and sellers over price.

Spurred on by regulators, which are keen for banks to merge to boost profitability, and by historically cheap bank share prices, lenders have been taking action to grow by acquisition. Spain's CaixaBank SA is planning to take over peer Bankia SA, while Italy's Intesa Sanpaolo SpA acquired Unione di Banche Italiane SpA.

But one of the biggest potential bank deals of the year — Banco Bilbao Vizcaya Argentaria SA's attempt to acquire mid-sized rival Banco de Sabadell SA — fell flat after BBVA walked away over price. France-based Crédit Agricole SA's move on Credito Valtellinese SpA has been met with resistance as the Italian lender and shareholders want more money.

Low price-to-book

Because of "very low" price-to-book values of banks in Italy, and across Europe, "everyone is looking," Tom Kinmonth, fixed-income strategist at ABN Amro, said in an interview. Banks such as Crédit Agricole, already present in Italy, want to take advantage of low valuations to expand their businesses, he said.

"It's more price-based if you can get hold of opportunities at the moment and leverage the existing franchise," he said.

Price-to-book value compares a company's market capitalization to its book value. According to S&P Global Market Intelligence data, all of Italy's large banks are trading below their book value, save Banca Mediolanum SpA, which had a price-to-book of 208.03% as of Dec. 11. Intesa Sanpaolo has a price-to-book of 55.55%, while UniCredit SpA's is 31.75%.

All of the largest Spanish banks are trading below book value. The country's largest lender by assets, Banco Santander SA, had a price-to-book ratio of 52.79% at Dec. 11, while that of the country's second-largest bank, BBVA, was 61.32%. Sabadell's was 15.33%.

At the end of the third quarter, UniCredit's return on average equity — a key measure of profitability — was 4.48%, while Intesa's was 23.94% and Creval's 5.75%. In Spain, the ROAEs of BBVA, Santander and Sabadell stood at 11.86%, 8.94% and 1.85%, respectively.

'Upset' by prices

BBVA and Sabadell called off their merger discussions on Nov. 27 after they failed to agree on a price, less than two weeks after announcing talks. BBVA reportedly valued Sabadell at €2.5 billion, largely in line with its current market value, but Sabadell management believed that the offer was too low given its book value of €12.7 billion, El Economista reported.

Creval shareholder Hosking Partners LLP wrote to Creval CEO Luigi Lovaglio and the lender's board of directors on Dec. 11, saying that Crédit Agricole's €737 million bid "falls short of our view of fair value and fails to reflect an adequate control premium." Crédit Agricole is offering to pay €10.50 a share for Creval, a 21.4% premium to the latter's Nov. 20 spot price.

The target banks may be upset by the proposed prices, but low valuations are giving buyers ideas, Jérôme Legras, head of research at Axiom Alternative Investments, said in an interview.

"It's not just chance that since the crisis we have seen more M&A than in previous years," he said. "The stock prices are what they are. When you offer a premium of 20%, it is interesting for shareholders even if they have the impression that, over the long term, the value of the banking sector has been massacred."

The whole banking sector is seeing a similar dynamic, he said.

"It's not just one bank," he said. "It's hard to say that Sabadell or Creval is worth more than that because if that's the case, what are the others worth?"

'Unrealistic' expectations

Creval declined to comment. A Crédit Agricole Italia spokeswoman said the offer price was 50% higher than that of the average six months before Feb. 21, 2020, and prior to the COVID-19 outbreak in Europe.

Hosking also said Creval's tangible book value rose to around €1.8 billion when taking into account off-balance tax credits and that "the 'excess capital' for the business could feasibly be above €500 million."

But investment bank Equita said in a research report that Creval shareholders "would hardly benefit from the bank's excess capital due to the likely worsening of the asset quality following the expiry of moratoria."

Italian banks, like most European lenders, granted loan holidays for businesses and individuals struggling with repayments amid the pandemic, and there are concerns that banks will be saddled with an increase of bad loans when the postponements stop.

Considering 1x tangible book value as an "anchor" for an offer is "unrealistic," as banks have been trading at less than 1x since the 2008 financial crisis and currently trade at an average price to tangible book value of 0.40x, Equita analysts said. Crédit Agricole's offer values Creval at 0.43x price to tangible book value, despite the Italian bank's "subdued profitability," with estimated return on tangible equity of 2.6% for 2021 compared to a 4.2% average for the sector.

And given the low prices, banks like BBVA are not going to be prepared to pay more than they need to for a smaller rival such as Sabadell as they can expand naturally on the domestic Spanish market without taking on the costs of integrating another less profitable lender, Kinmonth said.

"They were quite shrewd on that side and thought 'it's not a good price [with Sabadell] so we'll just relax a little bit,'" he said.