The ECB is leaning towards approving UniCredit's (CRDI.MI) takeover of Germany's Commerzbank (CBKG.DE), an internal document detailing its preliminary view of the Italian bank's attempt to create one of Europe's largest lenders shows.
While the euro zone's central bank found "no grounds to object", the document shows, it expects a "challenging and long-lasting" integration, with German supervisors requiring "a mitigation strategy" to build support within Commerzbank as well as stronger checks and balances at UniCredit.
The document, seen by Reuters, was presented last month to the European Central Bank's Supervisory Board which brings together regulators from the central bank and national authorities. The board considers the views of national supervisors on takeover deals before making a final decision, which is then ratified by the ECB's Governing Council.
Spokespeople for the ECB, German regulator BaFin, UniCredit and Commerzbank declined to comment on the document, which said that the application remained incomplete and a final review would take place in September or October.
UniCredit has built a roughly 48% stake in Commerzbank through a €43 billion ($49.60 billion) hostile bid, prompting resistance from management, staff and the German government, although some opposition has recently softened.
Approval from the ECB, which has long backed cross-border mergers to strengthen European Union integration, would remove the main regulatory hurdle to the deal.
GERMANY'S BAFIN AIRS UNICREDIT CONCERNS
The document offers a rare glimpse into deliberations over the biggest EU banking deal since the global financial crisis.
In it, BaFin raised several previously unreported concerns about UniCredit's governance and conduct during the takeover.
The German regulator, which had faulted some UniCredit adverts during its Commerzbank stake building, highlighted what it said was "aggressive and partially intransparent behaviour".
It also said it had concerns about "weaknesses in checks and balances" at UniCredit and called for stronger governance.
BaFin said the hostile nature of the bid had alienated Commerzbank management, staff, unions and political stakeholders and UniCredit would need a credible strategy to rebuild trust.
UniCredit declined to comment on BaFin's views.
NO MATERIAL GROUNDS TO OBJECT
The ECB acknowledged many of the same challenges but concluded they did not justify blocking the transaction.
It said concerns over UniCredit's board had already been addressed through supervisory measures, including more detailed board minutes and stronger oversight.
Anti-money laundering shortcomings at its German subsidiary were also being remedied, the ECB said.
The ECB highlighted Commerzbank's size and complexity, cultural differences between the two banks and tensions created by UniCredit's hostile bid.
It said cooperation was already difficult and warned that integration would carry material execution risks.
The ECB is challenging UniCredit's assumptions that it would preserve a 12.5% capital ratio thanks to lower payouts even after taking a 51% stake. Such scrutiny is routine and does not signal opposition.
It also said UniCredit's integration plans lacked detail at the time of the presentation last month. A full application was submitted in late July.
($1 = 0.8669 euros)
