UniCredit and Commerzbank square off with target hikes amid takeover battle

• UniCredit and Commerzbank flaunted their financial strength as the fate of one of Europe's largest banking mergers still hangs in balance.
• Both banks raised their outlooks guidance on Wednesday, as they reported third-quarter results.
• Markets are watching for whether UniCredit will press ahead with efforts to lure Commerzbank into a takeover, after the Italian bank unexpectedly built a stake in its German counterpart in September.

Two months since UniCredit played its opening move to woo German lender Commerzbank, the lenders flaunted their financial strength as one of Europe's largest banking mergers still hangs in balance.

Both banks reported third-quarter results on Wednesday, with UniCredit posting an 8% year-on-year hike in net profit to 2.5 billion euros ($2.25 billion), compared with a Reuters-reported 2.27-billion euro forecast. It raised its full-year net profit guidance to above 9 billion euros, from a previous outlook of 8.5 billion euros.

For its part, Commerzbank revealed a 6.2% drop in net profit to 642 million euros in the third quarter amid a broader drop in net interest income and higher risk provisions. The lender nevertheless said it has lifted its 2024 expectations for net interest and net commissions income, and confirmed its full-year forecast of achieving a net result of 2.4 billion euro, compared with 2.2 billion euros in 2023.

Speaking to CNBC's Annette Weisbach, Commerzbank CEO Bettina Orlopp said the bank experienced a "very good quarter," while acknowledging a clear impact on business from lower interest rates in Europe.

She stressed that Commerzbank was on a path of raising its share value through a blend of capital return and higher profitability and the expediency with which the lender hits its targets.

"We have a very good strategy in place, which is also delivering," she said — as markets watch for whether the bank will assume a defense strategy to fend off takeover interest.

Commerzbank has so far shied from UniCredit's courtship. When the Italian lender showed its hand by using derivatives to build a potential 21% stake in Commerzbank, the German lender appointed a new CEO and sharpened its financial targets. On Monday, the German bank said it had received regulatory approval to buy back 600 million euros ($653 million) in shares, due to kick off after the Wednesday earnings report and complete by the middle of February.

Yet Orlopp told CNBC that Commerzbank was not intrinsically opposed to a merger:

"We have nothing to be against, because there is nothing on the table. That's very important to note. And we also always said we would be very open to discuss, if they had something coming on the table, we will carefully review that with our own standalone strategy and see where we can create more values in the interest of our stakeholders," she said.

The German government has yet to bless the potential union, with Chancellor Olaf Scholz slamming that "unfriendly attacks, hostile takeovers are not a good thing for banks," in late-September comments carried by Reuters.

The largest shareholder of Commerzbank, the Berlin administration retains a 12% stake after rescuing the lender during the 2008 financial crisis and divesting 4.5% of its initial position in early September.

But a potential schism at home could waylay Scholz's ruling alliance from closely supervising the transaction, with coalition members due to hold scheduled talks later on Wednesday. 

"Let's put it this way: we wouldn't be here if we hadn't been invited to buy that stake. And it all started in a way that we thought was constructive," UniCredit CEO Andrea Orcel told CNBC's Charlotte Reed on Wednesday.

"As part of the wall-crossing process, the investment bank commissioned by the finance agency contacted various investors, including UniCredit Group, on the morning of September 10. The purpose of this process is to assess the market environment on the day of the transaction," a spokesperson for the Ministry of Finance said in response to a CNBC request for comment.

"The invitation to this process cannot be understood by a professional investor as an invitation by the German government to acquire shares in Commerzbank," the spokesperson added.

Appetite for large European cross-border bank mergers has simmered since the controversial 2007 takeover and later evisceration of Dutch lender ABN Amro by a consortium led by the Royal Bank of Scotland — which brought both banks to collapse during the financial crisis. UniCredit CEO Andrea Orcel, then a senior investment banker at Merril Lynch, advised on the ABN Amro transaction — and has once more turned his eye to international ventures, after the Italian lender walked away from a domestic deal to acquire the world's oldest bank, Monte dei Paschi, in 2021.

UniCredit is already present in Germany through its HypoVereinsbank branch — which Orcel said he sees, alongside Commerzbank, as "two mirror images."

Last year, UniCredit purchased a nearly 9% stake of Greece's Alpha Bank from the state-owned Hellenic Financial Stability Fund. On Tuesday, the Italian lender announced it completed acquiring a majority 90.1% interest in Alpha Bank's Romanian business and plans to complete absorbing the entity in the second half of 2025.

With a common equity tier 1 ratio (CET 1) — a measure of a bank's strength and resilience — above 16% in the first three quarters of this year, UniCredit appears equipped to weather the strain of a takeover. Last week, Fitch Ratings upgraded its rating on UniCredit's long-term debt to BBB+ — just above the BBB grade of Italy's sovereign bonds — citing the lender's "multi-year long restructuring, balance sheet de-risking and materially improved loss absorption capacity."

The ratings company noted that UniCredit's acquisition of a 21% stake in Commerzbank had had no "immediate effect" on its ratings.

Orcel brushed off the exposure risks associated with its stake build in the German lender and a potential takeover:

"Our CET1 is a lot higher than the one Commerzbank has, [but] we need to look at liquidity, we need to look at everything else, like rating agencies. At the end of the day, I don't think there is a concern there. If there was, we would know about it before we ever had moved," Orcel noted, stressing UniCredit's record in Germany:

"Unicredit went through a real difficult time through the [financial] crisis," he said. "At no time did we squeeze Germany, at no time did we repatriate capital or liquidity from Germany, at no time did we ask for government support. Something that Commerzbank had to do."

But the deal is not yet done — and Orcel said UniCredit will only march ahead "if it gives us the returns out investors expect, actually, they need to improve those returns meaningfully."