European bank consolidation: a slow process

Merger and acquisition (M&A) activity in Europe’s banking sector was again muted in 2015, according to data released by SNL Financial.

The business intelligence services company, now part of McGraw Hill Financial, reports that although the number of M&A deals in Europe edged higher last year from 2014, the aggregate value remained low compared to past years.

The total value of European bank M&A deals was €4.22bn in 2015, beating the figure for 2013 but lower than the figures of €4.39bn recorded in 2014, €8.12bn in 2012 and €10.39bn in 2011.

A total of 13 M&A deals were announced last year in Russia, bringing the total number of deals completed since 2010 to 92. Spain is a distant second, with a total of 41 M&As over six years – although the majority were in 2010 and 2011 and no deals at all took place in 2015.

SNL reports that Russia’s M&A activity appears to be driven by troubled smaller banks needing support, rather than market demand for acquisition. Often, when a bank gets into difficulties, a buyer pays near to nothing to acquire the usually small lender and frequently has the additional motivation of receiving financial help through cheap funding – for example, through Russia’s deposit insurance agency.

This has enabled some medium-sized banks to gain smaller distressed lenders in Russia. This trend is likely to continue, as the regulator has an interest in avoiding a potential snowball effect on other lenders due to interbank exposure or via corporates that have large deposits at distressed institutions, the analyst noted.

Russia’s economy, estimated by the Economist Intelligence Unit (EIU) to have contracted by 3.80% in 2015 and set to shrink further in 2016, is facing pressure from a low oil price and sanctions related to its involvement in the Ukraine crisis, creating a difficult operating environment for banks.

Germany and Italy

SNL Financial reports that Germany saw the second-highest number of bank deals in 2015, with eight announced transactions – six of which involved local savings banks or ‘sparkassen’. This brings the total since 2010 to 18 M&As, with activity starting to pick up in 2014 when there were four deals.

Germany has a large public banking sector, and many sparkassen are merging their operations. Niederrheinische Sparkasse RheinLippe and Sparkasse Dinslaken-Voerde-Hünxe, which announced their union last month, stated that joining forces would improve their ability to deal with the challenges of a low interest rate environment, growing pressure from competition and an increasing regulatory burden. However, many of the institutions involved are fairly small, so the effect on the consolidation of Germany’s fragmented banking market is limited.

In Italy, where five deals were announced in 2015 – lifting the total since 2010 to 20 – activity is driven by a consolidation in the cooperative sector, with four of the transactions involving cooperative banks.

SNL Financial comments that Italian regulators have introduced rules intended to push cooperative, or popolari, banks toward adopting joint-stock status, which has motivated many to seek merger partners within Italy. The popolari fear they could attract aggressive bids or be acquired by foreigners, so are seeking friendly deals.

Keeping it local

The 2015 data also shows that most M&A activity involving European lenders in 2015 – namely three in every four deals – happened within a specific country, as opposed to cross-border. However, the largest deal by value announced last year was the €2.35bn acquisition of the UK’s TSB Banking Group by Spain’s Banco de Sabadell.

While M&A activity in Europe overall increased slightly in 2015 year-on-year, the aggregate value of the deals fell over the period, remaining far below its 2011 peak. Meanwhile, a European Central Bank (ECB) report published last October indicates that, although M&A activity has been slowing down in recent years, the number of credit institutions in the European Union (EU) has steadily decreased since 2008.

European Bank M&A Deals 2010 - 2015

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