UniCredit and Commerzbank engage in a battle over target increases during a takeover.

• The fate of one of Europe's largest banking mergers remains uncertain as UniCredit and Commerzbank showcase their financial strength.
• On Wednesday, banks updated their outlook guidance after reporting third-quarter results.
• UniCredit's plans to acquire Commerzbank are being closely monitored by markets, following the Italian bank's surprise acquisition of a stake in the German bank in September.

Since UniCredit made its first move to attract a German lender two months ago, the lenders have been showcasing their financial might as one of Europe's largest banking mergers remains uncertain.

On Wednesday, both banks released their third-quarter results. UniCredit reported an 8% increase in net profit to 2.5 billion euros ($2.25 billion), exceeding the 2.27-billion euro forecast. Additionally, UniCredit raised its full-year net profit guidance to above 9 billion euros, up from its previous outlook of 8.5 billion euros.

In the third quarter, Commerzbank reported a 6.2% decline in net profit to 642 million euros, due to a decrease in net interest income and an increase in risk provisions. Despite this, the bank raised its 2024 expectations for net interest and net commissions income and maintained its full-year forecast of achieving a net result of 2.4 billion euros, compared to 2.2 billion euros in 2023.

Bettina Orlopp, CEO of Commerzbank, stated in an interview with Annette Weisbach of CNBC that the bank had a "very good quarter," despite the impact of lower interest rates in Europe on business.

She emphasized that Commerzbank was focused on increasing its stock value by combining capital return and higher profitability, as well as the speed at which the bank achieves its goals.

"Our strategy is effective and delivering results, as markets monitor the possibility of a defense strategy to protect against takeover interest," she stated.

Commerzbank has avoided UniCredit's advances. When UniCredit revealed its plans to acquire a potential 21% stake in Commerzbank through the use of derivatives, Commerzbank appointed a new CEO and set more stringent financial goals. On Monday, Commerzbank announced that it had received regulatory approval to repurchase 600 million euros ($653 million) in shares, which will commence after the Wednesday earnings report and be completed by the middle of February.

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

"We have nothing to oppose because there is nothing on the table. It's crucial to remember. Additionally, we have always stated that we are open to discussing any proposals that come to the table, and we will carefully evaluate them with our own independent strategy to create more value for our stakeholders," she stated.

The German government has not approved the potential union, as Chancellor Olaf Scholz stated in late-September that "unfriendly attacks and hostile takeovers are not beneficial for banks."

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

Scholz's ruling alliance may face a potential schism that could hinder its close supervision of the transaction, with coalition members scheduled to hold talks later on Wednesday.

If it weren't for being invited to purchase that stake, we wouldn't be in our current position. It all began with what we initially believed to be a productive approach. UniCredit CEO Andrea Orcel shared this with CNBC's Charlotte Reed on Wednesday. The German Ministry of Finance has been contacted for comment.

The desire for large cross-border bank mergers in Europe has decreased since the 2007 acquisition and subsequent collapse of Dutch lender ABN Amro, which was led by a consortium including the Royal Bank of Scotland. UniCredit CEO Andrea Orcel, who advised on the ABN Amro transaction, has now turned his attention to international ventures after UniCredit abandoned a deal to acquire Monte dei Paschi in 2021.

HypoVereinsbank, a branch of UniCredit, is already present in Germany. According to Orcel, it is similar to Commerzbank.

In 2020, UniCredit bought a nearly 9% stake in Greece's Alpha Bank from the Hellenic Financial Stability Fund. On Tuesday, the Italian lender announced it had acquired a majority 90.1% interest in Alpha Bank's Romanian business and plans to absorb the entity in the second half of 2025.

UniCredit's CET 1 ratio above 16% in the first three quarters and Fitch Ratings' upgrade of its long-term debt to BBB+ indicate that the bank is well-positioned to handle a takeover.

UniCredit's acquisition of a 21% stake in Commerzbank did not have an immediate impact on its ratings, according to the ratings company.

Orcel dismissed the risks of exposure associated with its investment in the German lender and the possibility of a takeover.

UniCredit's CET1 is higher than Commerzbank's, but it's important to consider liquidity and other factors, such as rating agencies. Ultimately, there is no concern about this, as UniCredit has a strong record in Germany.

"Unicredit faced a significant challenge during the financial crisis," he stated. "We did not take any measures to tighten our operations in Germany, did not repatriate capital or liquidity from the country, and did not seek government support. This is in contrast to Commerzbank, which had to do so."

If UniCredit does not provide the expected returns, the deal will not be completed, and Orcel stated that the bank will only proceed if there is a meaningful improvement in the returns.