French bank Societe Generale is mulling a combination with bigger domestic rival BNP Paribas, a French newspaper said on Friday, in a deal which could create a French national champion in banking.
Les Echos said SocGen head Daniel Bouton had asked two investment banks to advise on a tie-up with BNP which could create a combined group ranking first in France by market value and third in Europe as a whole.
The deal could shield SocGen from any unwanted approach from other European suitors but would threaten extensive job cuts due to the overlapping branch networks of the two lenders, making it potentially politically controversial.
It would also mark a further advance in the rapid consolidation of Europe's hitherto fragmented banking industry, coming just weeks after Italy's UniCredit, with which Societe Generale has been linked in the past, moved to merge with domestic rival Capitalia.
In the same sector, Dutch ABN AMRO agreed a deal with Barclays but also faces a rival offer by a consortium of Royal Bank of Scotland, Fortis and Santander.
A senior trader at a large French bank said he doubted the Les Echos story was true but believed the information served another goal. "It's a smokescreen. The idea is to play up the enormous social costs of such a deal in order to discredit a scenario of BNP emerging as white knight in the case of a foreign bid for SocGen," he said.
Les Echos said both a friendly deal and hostile bid were being examined but Societe Generale's management was divided over the idea. It named one of the adviser banks as Morgan Stanley.
"We do not comment on rumours," a Societe Generale spokeswoman said. The bank recently said a major operation was "neither necessary nor urgent".
Analysts said if a deal materialised it would highlight the impetus for consolidation of the sector in France.
"It would show that the pressure is larger than we thought and that Societe Generale believes it should act swiftly," said analyst Jean Sassus of Raymond James Euro Equities.
Another analyst noted the report "shows that there is a real consideration of a rapid movement."
BNP shares traded 0.9 percent up at 86.69 euros at 1019 GMT, after earlier gaining more than 3 percent, and Societe Generale was flat at 139.5 euros.
Rumours of a possible merger have resurfaced regularly ever since BNP made a failed takeover attempt on SocGen in 1999, after which it managed to absorb Paribas.
But BNP Chief Executive Baudouin Prot said on May 15 his bank was not interested in a deal with Societe Generale, telling shareholders such a link would carry "huge execution risks".
BNP is larger than SocGen with a market capitalisation of around 80 billion euros compared with SocGen's 64 billion.
At the moment, HSBC is the biggest European bank by market value, followed by Royal Bank of Scotland and Banco Santander. BNP is number 4 and SocGen ranks 9 by market capitalisation, and the combination would be third.
The CGT union said in May Bouton had said he had identified eight banks with whom SocGen could strike a possible merger deal, including Italian bank UniCredit but not including BNP.
Analysts at Keefe, Bruyette & Woods said after the CGT report that SocGen was increasingly unlikely to pursue a standalone strategy. It said Intesa/SPI, Citigroup, UniCredit, HSBC and JP Morgan Chase were likely bidders for the bank.
But Royal Bank of Scotland, Barclays, BNP, Deutsche Bank and Santander were seen as unlikely candidates.
Societe Generale board member Luc Vandevelde told Reuters earlier this month the bank needed to become a European leader in the current consolidation round.
"There is a new era and if you want to stay in the first league of banks in the world you need to be leader ... on at least a regional level, so that means Europe for us," he said on the sidelines of a conference in Venice.