BNP Paribas' move for ABN Amro casts doubt on commitment to digital plans

BNP Paribas SA's reported interest in buying Dutch lender ABN AMRO Bank NV could indicate hesitation in the French banking giant's digitalization push, analysts said.

Europe's largest bank suggested it would be willing to buy the Netherlands' third-largest lender during a meeting some months ago with its largest stake owner, the Dutch government, according to a June 17 report by Bloomberg News. A deal would be the first major cross-border European bank merger since regulators began encouraging consolidation following the 2008 financial crisis.

BNP has the spare capital to finance a deal — which would almost certainly surpass ABN's current €9.23 billion market capitalization — following its $16.3 billion sale of San Francisco-based Bank of the West in December 2021.

Strategic questions

In February, BNP said its 2022-2025 strategy would include a focus on investment in technology firms to accelerate its move toward digital banking.

"Strategically, [buying ABN Amro] might not be the best use of excess funds for BNP," Sam Theodore, senior consultant at Scope Insights, said in an email. "Buying a large legacy bank in another country is perhaps less optimal in the digital age than pursuing digital initiatives in France, across Europe, and selectively globally."

BNP Paribas and ABN Amro did not respond to a request for comment.

France, where BNP generated more than 13% of group revenues and around 8% of group pretax profit in 2021 from its retail banking business, trails nine other European markets in online banking penetration, according to 2021 data by the European Union's statistics office, Eurostat. Around 72% of people in France banked online in 2021, compared with 95% in Denmark, 93% in Finland and 91% in the Netherlands.

Improving digital banking services reduces customers' dependence on large, costly retail branch networks, which are one of the main reasons French banks' cost-to-income ratios — a key measure of efficiency — are higher than European peers. Among a sample of 38 of Europe's largest banks, France's four largest lenders by total assets came in the bottom half for efficiency in the fourth quarter of 2021, S&P Global Market Intelligence data shows.

Technology is one of the three pillars of BNP's new strategy, alongside growth and sustainability.

"We are looking at investing in technology, new business models, bolt-on acquisitions, [and] accelerating organic growth in a number of domains," CEO Jean-Laurent Bonnafé said at the bank's strategy presentation in February.

BNP's interest in ABN Amro casts doubt on some of the forecasts made in the bank's strategy and should be interpreted negatively by investors, said Andrew Lowe, French banks equity analyst at Berenberg, in a June 17 note.

"A willingness to enter a new region via a large deal with no obvious cost synergies suggests that its organic growth opportunity may be weaker than perceived," Lowe said.

BNP has a record of looking to boost growth through acquisitions in unfamiliar European markets. The bank bought Italy's BNL in a €9 billion deal in 2006, followed by a €14.5 billion purchase of Fortis' businesses in Belgium and Luxembourg in 2009.

Bank stock decline

European bank stocks have lost value in recent years, trading well below levels seen only five years ago. The S&P Europe BMI Banks Index has fallen more than 27% since June 2017, while ABN Amro's share price sank by more than 50% over the same period, making the Dutch bank comparatively cheap.

Still, the lack of overlap between BNP's and ABN's businesses would make it difficult for the Paris-based lender to find enough cost-savings to make the deal attractive, Lowe said.

"Without European banking union, which we believe is still far from implementation, a cross-border acquisition is hard to justify," Lowe said.

Banking union is a European Union project to fully integrate the eurozone's banking systems in response to weaknesses exposed by the global financial crisis and euro sovereign debt crisis. One of the main obstacles to achieving it is national authorities' reluctance to allow cross-border banking groups, such as BNP, to manage liquidity at a group-wide level in a pool established by the parent company, which could risk damaging national banking systems in the event of a crisis.

The price the Dutch government is willing to accept for its 57% stake in ABN Amro could be another barrier to a deal. The Dutch government bailed the bank out in 2008 when the global financial crisis hit as management in the preceding years had weakened the lender. The state has since struggled to sell down its stake and is still owed €11.1 billion from the deal, according to an estimate by Berenberg.

"We expect that the Dutch government would be an unwilling seller at [the level BNP is likely to bid]," said Lowe.

Channeling the capital from the sale of Bank of the West into a major acquisition rather than spreading it thinly across a variety of deals is attractive in some respects, Anke Reingen, banks analyst, RBC Capital Markets, said in a June 17 note. Still, the imperative of accelerating the digitalization of the bank might convince the bank to back away from such a deal, Reingen added.

"While it would be positive to have a recognizable return of investment from the BancWest proceeds rather than a drip feed into smaller bolt-on deals, we expect BNP to use the proceeds for more transformational changes in the bank rather than expand geographically," said Reingen.