The sixth edition of Deloitte's study on M&A in banking in Central and Eastern Europe provides an analysis of the current state of the banking sector in the region. The study looks at macroeconomic factors, banking market dynamics, transaction trends and, for the second year, offers an overview of developments within the fintech sector.

In 2023, banks faced challenges in dealing with macroeconomic and geopolitical uncertainty and the significant changes brought about by technological innovation. These changes offer banks a strategic opportunity to rethink and redefine their position for the future. Despite the challenges, the banking sector's ability to adapt to evolving economic conditions underlines its flexibility and potential for further growth in the period ahead.

The total balance sheet of the banking sector in the CEE region recorded a 5.8% growth and reached EUR 1,931 billion, dominated by Poland, the Czech Republic and Hungary, which together accounted for more than two-thirds of total assets. Challenges stemmed from the unfavourable macroeconomic environment and rising interest rates, which impacted loan demand and asset growth.

Despite these challenges, the regional banking sector has demonstrated resilience through strong capital endowment and high profitability. The return on equity rose from 6.4% to 11.1% between 2020 and 2022, and despite a slow take-off in lending activity in 2023, the sector's annualized return on equity jumped to an average of around 18% in the first half of 2023, a record last seen before the global financial crisis in 2008. The impressive profitability was driven by higher net interest margins, which were supported by relatively controlled risk costs due to a persistently low default rate and a strong focus on managing operating costs, notwithstanding high inflation. With the progressive introduction of digitalisation, banks have been able to reduce the number of branches and the cost of their physical distribution networks.

The number of M&A deals in the CEE region has continued to decline since the last study, with 4 deals in progress and 7 deals successfully closed as of the end of December 2023.

In the first half of 2023, total financial sector assets in the Czech Republic grew by 13.8% compared to the end of 2022, reaching EUR 420 billion, while the banking sector, which accounted for almost 80% of the assets of the domestic financial sector at the end of 2022, recorded annual growth of 4.5%. Total lending showed a significant 13.0% growth in 2022 and a further 4.9% growth by H1 2023, with both corporate and retail lending growing.

The banking sector in the Czech Republic consists of 21 banks after the liquidation of Sberbank CZ and the takeover of Equa Bank by Raiffeisenbank. International banking groups such as Erste, KBC and Raiffeisen Bank International (RBI), whose subsidiaries are among the largest banks in the country, have a strong presence here. In the domestic banking market, some major players are considering potential acquisitions. The concentration of the domestic banking sector has increased after the acquisition of Equa bank by Raiffeisenbank was completed in 2022. Concentration was also affected by the closure of Sberbank CZ, as Česká spořitelna acquired part of Sberbank CZ's business, consisting mainly of its loan portfolio, for around EUR 1.7bn. In 2022, the 3 largest banks together had a market share of more than 50%.

"The year 2023 on the Czech banking market was characterised mainly by high interest rates, which held back the growth in the volume of lending, especially in the retail mortgage segment. Higher rates were also reflected on the deposit side of the balance sheet last year, with savings accounts and time deposits offering savings appreciation at a level that clients had not been used to for many years.

Despite the worsening economic situation, the Czech banking sector remains profitable and healthy, with NPL ratios remaining low despite the Czech Republic's high inflation rate.

The most active player in the market of bank acquisitions last year was Česká spořitelna, which, in addition to completing the takeover of the Sberbank CZ executive loan portfolio as part of insolvency proceedings, also bought the consumer loan portfolio of Hello bank!, the Czech branch of the French bank BNP Paribas Personal Finance. The concentration of the domestic banking sector continues."

-Roman Lux, Partner, Financial Advisory/FSI/Valuation and Modelling

For the second year, the study also includes a FinTech Sector Analysis, which examines CEE fintech trends and lists the top fintech companies in each country. M&A activity in the banking houses spills over to FinTech companies. After initial hesitation, banks are realising the added value of this dynamic sector, while investors and founders of FinTech companies are looking for strong allies to take their business model one step further. Thus, in the coming years, we expect not only a continued trend of consolidation in the banking market, but especially a growing interest in acquiring complementary FinTech business models.

The full report can be downloaded here: ​CEE Banking M&A Study 2023 | Deloitte Hungary