June 2025

“Bank failures are caused by depositors who don’t deposit enough money to cover losses due to mismanagement.”  Dan Quayle

One long-running theme in European financial circles has been consolidation of the banking sector.  It’s something we’ve written about extensively over the years and recently it returned to the spotlight as the sector has returned to health.  Thus far however, reality has not lived up to the hype, as the number of completed or announced deals has been relatively limited.  But there were signs of change in June as several new bids were announced or rumoured while some longer standing situations appeared to be edging forward to resolution.  The majority of the transactions are domestic and could be described as a straightforward acquisition by a larger institution.  There are also several deals – Monte Paschi’s bid for Mediobanca for example – that could more appropriately be described as far-fetched and would have felt at home in the pre-2008 “Go-Go” days.

Why has the long-awaited consolidation failed to materialize?  The primary reason is that with banks once again running profitably there is an expectation that any takeover offer needs to come with a healthy premium.  A lack of financial stress also heightens the social issues in mergers, i.e., what happens to the CEO of the target bank.  And while government approval is always a prerequisite for mergers in this highly regulated industry, we’ve seen in the case of Italy and Spain an intervention that goes beyond concern for the health of the country’s financial system.  So, despite the efforts of cheerleaders in the financial press and the M&A advisory community, we are unlikely to see a major wave of deals, especially of the cross-border variety.

Considering how many things were going on in June – the strike on Iran, mounting concerns over deteriorating government finances and mixed economic data, markets were remarkably chilled.  Equities continued to rally, making April’s wobble look more and more like the dip that should have been bought.  In the meantime, the future course of interest rate policy appears to be caught in the middle of a tug-of-war between softer growth and fears that inflation may get rekindled by runaway fiscal deficits.  Our view remains that lower rates are likely in the short term, but our longer-term outlook is hazier, which means that the ideal condition for risk assets likely remains, but the end of the year could be bumpy.

European financials were well supported in a quiet month in the markets.  While equities paused from recent strength, apart from names that featured as acquisition targets, credit spreads continued to slowly grind tighter.  We have returned to a market with limited excess risk premiums across the majority of securities, and while this situation can last for some time, in the past it has been a sign of vulnerability to shocks.  We believe the performance of the market these past months has also been a validation of our strategy, which has seen us focus increasingly on idiosyncratic opportunities at the expense of reduced beta exposure.  For the month, the funds A shares were up +2.74% bringing the half-yearly results to +10.7%.  We saw credit contribute +310bps in gross performance while equities added just +4bps.

Looking forward we see no reason to alter our approach.  In the coming months we would expect to continue to harvest existing positions while retaining maximum flexibility to set ourselves up for the run into year-end.