The consolidation drive is expected to continue into 2022, with domestic deals taking the lion’s share of activity, according to report.
The surge in European bank merger and acquisition (M&A) activity shows no sign of slowing down, driven by domestic deals and a rise in interest by non-bank investors, according to a recent report ‘Sustained momentum around bank M&A in Europe’ by Scope Ratings.
“This trend was picking up before Covid-19 because of the digital pressures and the low interest rate environment,” says Dierk Brandenburg, an analyst at Scope Ratings. “But now as we come out of the pandemic it’s really taking off.”
Since the start of 2020, financial data firm Refinitiv has tracked 50 deals involving European banks totalling almost $37bn of value, led by a raft of tie-ups in Spain and Italy. A series of further potential deals may be in the pipeline, according to the Scope report.
The logic behind large cross-border deals remains unclear, the cost synergies are limited, and the risks are higher
Despite efforts by the European Central Bank to encourage cross-border consolidation in the euro banking area to boost resilience, most of the consolidation is happening within national borders. “The logic behind large cross-border deals remains unclear: the cost synergies are limited and the risks are higher, not to mention the weak growth prospects in the euro area,” Mr Brandenburg says.
Domestic mergers offer second-tier lenders the opportunity to leverage the benefits of scale and gain on dominant market leaders, while market leaders are seeking opportunities to consolidate their positions.
“Cost savings and synergies, and the need to reposition franchises towards more profitable areas, are driving these [domestic] deals,” he says. “The selling banks cannot make the investments they need to address legacy issues and spend on future technology on their own.”
Non-bank buyers
The Scope report highlights how non-bank financial investors, as well as banks, are behind the consolidation drive. “If incumbent banks are not able or willing to do these deals, there’s clearly other money out there, such as private equity,” Mr Brandenburg says.
HSBC, for example, is selling its French retail banking network to US private equity group Cerberus Capital Management for a $3bn loss, as the group steps up its focus on Asia.
Cerberus has also been actively acquiring banks or bank stakes in Europe, including in Deutsche Bank, Commerzbank, Hamburg Commercial Bank and Bawag.
Another private equity group, Apollo, alongside investment firm JC Flowers, has reportedly submitted bids for Portuguese bank EuroBic, alongside domestic bidders Novo Banco and post office bank Banco CTT.
JC Flowers and Bain Capital also recently acquired a 10% stake in the UK’s Co-operative Bank.
Italy and Spain lead the way
A lot of the M&A activity has involved Spain and Italy. In Spain, CaixaBank acquired Bankia for €4.3bn, Unicaja bought Liberbank for €763m and Abanca paid €122.4m for a 99.81% stake in Basque bank Bankoa.
In Italy, Intesa Sanpaolo acquired UBI for €4.1bn and France’s Crédit Agricole acquired Creval for $1bn.
“The benefits of such deals remain strong because the fallout from the pandemic has enshrined negative rates and a flat yield curve outlook [for some time to come],” Mr Brandenburg says. “[The occasional] cross-border deals tend to be larger foreign players seeking to add scale through bolt-on acquisitions in core countries.”
Another possible domestic deal is UniCredit’s bid for Banca Monte dei Paschi di Siena (BMPS), where discussions are ongoing, which could involve UniCredit taking over defined parts of BMPS.
According to Scope, Spain’s Abanca could launch its own bid for BMPS as it looks to build scale. Earlier this year, Abanca acquired the Spanish business of Portugal’s Novo Banco.
UK challenger consolidation
The UK challenger and digital bank space in the UK is potentially ripe for consolidation, according to the Scope report. It has become a crowded market with dozens of incumbents, such as Monzo, Revolut and Starling, but profitability in the segment remains challenging.
Consolidation could take the form of in-segment mergers or takeovers or acquisitions of mobile-enabled challengers by larger banks seeking to accelerate their digital strategies, according to Scope.
“The UK has been active in developing the challenger bank business model, but many of these challengers struggle with profitability. The banks’ stakeholders may conclude it makes sense to combine operations going forward,” Mr Brandenburg says.
“I doubt they will sell out to the large banks, because that’s not something the regulator or the competition authorities will want to see, but they could combine to become bigger and stronger units among themselves.”
Meanwhile TSB Bank, which is owned by Spain’s Banco de Sabadell, remains open to offers as the group works on a turnaround programme. Sainsbury’s Bank, which is owned by the UK supermarket chain J Sainsbury, is also subject to consolidation speculation.
The Scope report forecasts the trend towards greater M&A to continue in 2021 and 2022, with domestic deals taking the lion’s share of activity.
“Financial innovation in the sector is going to throw up more changes,” Mr Brandenburg adds. “On top of challenger banks and fintechs, it will be interesting to see how payment systems develop in the next two years and who becomes the dominant providers. Fast-growing providers, such as [Swedish ‘buy now, pay later’ company] Klarna, could take away considerable business from banks prompting further upheaval.”
Continue reading: Time for European banks to set a new course after the storm
