What the acquisition of Commerzbank by UniCredit would imply for the banking industry.

• Commerzbank announced that UniCredit had acquired a 9% stake in the bank, with half of this shareholding coming from the government.
• UniCredit continues to surprise markets with some stellar quarterly profit beats.
• Last year, the company earned 8.6 billion euros, up 54% from the previous year, and also satisfied investors through share buybacks and dividends.
• Analysts are hoping that a move by UniCredit will encourage more cross-border consolidation.

The move of a company to invest in a German bank is sparking debate about whether a long-awaited cross-border merger could lead to more acquisitions and change the European banking industry.

Commerzbank has been rescued by the government during the 2008 financial crisis, and last week, UniCredit announced that it had acquired half of its stake in Commerzbank from the government.

The Italian bank, UniCredit, has expressed an interest in a merger with Commerzbank. However, Commerzbank has given a more lukewarm response to the merger proposals.

The move by UniCredit has been welcomed by analysts, who believe it could inspire similar activity in Europe's banking sector, which is often seen as more fragmented than in the U.S., with regulatory hurdles and legacy issues providing obstacles to mega deals.

Right fit for UniCredit?

UniCredit's move has caused a positive response from the market, with Commerzbank shares jumping 20% on the day of the announcement. The German lender's shares have increased by around 48% so far this year and added another 3% on Wednesday.

UBS analysts, led by Ignacio Cerezo, stated in a research note last week that investors appreciate the geographical overlap between the two banks, the consistency in financials, and the assumption that the transaction is "collaborative" in nature. Now, the ball is in Commerzbank's court.

According to a note from Berenberg analysts last week, a potential merger deal may have a limited impact on UniCredit's capital distribution plans. While there is strategic merit in a deal, the immediate financial benefits may be modest for UniCredit, with potential risks from the cross-border deal diminishing some of the benefit.

David Benamou, the chief investment officer at Axiom Alternative Investments, praised Orcel's decision to invest in Commerzbank as a "smart move" that makes sense because it would increase UniCredit's market share in Germany.

Benamou stated on CNBC's "Squawk Box Europe" that Commerzbank's "missed on costs in Q2" led to its current low valuation, and the moment Orcel took over was likely the best for the bank.

Benamou indicated that a takeover was possible in the short term, stating, "they will probably come to it."

Arnaud Journois, senior vice president of European Financial Institution Ratings at Morningstar DBRS, stated that UniCredit is currently on track to become a top bank in Europe.

UniCredit's move to access both the German and Polish markets through Commerzbank was explained by the Italian lender as having "double logic" on Wednesday, according to CNBC's "Street Signs Europe."

Journois stated that the next step for UniCredit, following its active behavior in the past two years through targeted acquisitions, is a logical one.

UniCredit consistently outperforms markets with impressive quarterly earnings, achieving a 54% increase in profit last year, totaling 8.6 billion euros. Additionally, the bank pleased investors through share buybacks and dividends.

What does it mean for the sector?

UniCredit's potential move could prompt more cross-border consolidation, as European officials have been increasingly advocating for larger banks, with French President Emmanuel Macron stating the need for greater consolidation in May during an interview with Bloomberg.

While European countries may be partners, they sometimes compete. As a policymaker, Journois knows that there is a desire for more consolidation from an EU standpoint. However, there are regulatory hurdles that make this difficult.

According to Reint Gropp, president of the Hall Institute for Economic Research, a cross-border styled merger between UniCredit and Commerzbank would be more preferential than a domestic merger between Deutsche Bank and Commerzbank.

Germany's banking structure requires immediate consolidation, as it currently has more banks than its GDP share in the euro zone. This was stated by Gropp on CNBC's "Street Signs Europe" on Wednesday.

Commerzbank has always been a potential takeover target in the German banking sector due to the fact that most other banks in the country are savings banks that cannot be acquired by private institutions, or cooperative banks that are also challenging takeover targets.

Will Deutsche Bank swoop?

Despite being seen as the top contender to take over Commerzbank after failed talks in 2019, UniCredit is reportedly developing its own defense strategy in response to its stake.

According to Filippo Alloatti, head of financials at Federated Hermes, Deutsche Bank is unlikely to make a strong rival bid for Commerzbank.

Deutsche Bank's CET1 ratio of 13.5% is "below target" of 13%, making it "less financially strong" compared to its Italian counterpart UniCredit, which has more excess capital.

Alloatti proposed that Deutsche Bank put on a "brave face" and consider another target, such as ABN Amro, which has been the subject of acquisition speculation.

"We've been anticipating this," Alloatti stated, discussing the possibility of additional consolidation in the industry. "If UniCredit succeeds, other management teams will certainly examine this example," he added, emphasizing the potential for domestic consolidation in Italy.

UniCredit's CEO made a "very bold move" that caught both the German government and Commerzbank by surprise, as acknowledged by Gropp.

Perhaps a daring action is necessary to bring about any modifications in the outdated European banking system, he remarked.

What's next?

UniCredit's proposals will be considered by Commerzbank's CEO, Manfred Knof, in accordance with the bank's obligations to its stakeholders, as reported by Reuters.

Last week, Knof informed the bank's supervisory board that he would not seek an extension of his contract, which ends in 2025. According to German newspaper Handelsblatt, the board may be considering an earlier change of leadership.

The supervisory board at Commerzbank will discuss UniCredit's stake next week, according to sources who requested anonymity. There are currently no plans to replace Knof immediately after the meeting, the sources added.

This report was contributed to by Annette Weisbach, Silvia Amaro, and Ruxandra Iordache of CNBC.