CEE banking consolidation perking up

About the study

Leveraging on the success of our NPL study series which provides an overview on non-performing loan markets in 15 countries across CEE and the Baltics, as a leading advisor not only in loan portfolio but banking entity deals as well, last year we decided to introduce a new study on banking M&A dynamics with the same geographical scope, which to our great pleasure was very well received by the market. Therefore, we are hereby issuing the second edition of our CEE banking M&A study.

Performance of the banking industry in the CEE and Baltics continued being reassuring. Capital adequacy ratios in 2018 remained solid with an average over 20% in the 15 countries, NPL ratios and volumes gravitated further to the south, while profitability rose to historically high levels in several countries with an average ROE around 11% and no loss making banking sectors. These positive dynamics were backed by stable economic expansion with an average real GDP growth of 3.9% in 2018, improving labour market conditions and intense lending activity in the region. Besides ongoing digital transformation, another prevailing trend in the regional banking sector is the consolidation of the banking market, driven by non-core exits on the sell side and acquisitive growth on the buy side by core regional players to increase economies of scale and boost efficiency. Multiple banking sectors in the region are overbanked with a fragmented market structure and a number of banks with low market shares, therefore with no efficient economies of scale. The expected economic softening might also put more pressure on less efficient banks. Consolidation seems to be perking up with an increasing number of deals. We have seen many recent deals from the inside, therefore we see that agenda is there on both sides of the deals, and acquirers have solid financial firepower to perform acquisitions. Based on all the above, steady deal flow might be expected in the CEE banking market in the forthcoming period also.

Key findings:

• Capital adequacy ratios in 2018 remained solid with an average over 20% in the 15 countries.
• Asset quality experienced significant development in the previous years and further improved in 2018 with shrinking NPL ratios mostly due to higher cure rate on the back of solid macro conditions, as well as active portfolio cleaning via loan portfolio sales. The average total NPL ratio in the 15 countries stood at 7.9% in 2018, 0.6 percentage point lower than in 2017. 
• Profitability rose to historically high levels in several countries with an average return on equity around 11% and no loss making banking sectors. 
• The CEE and Baltic banking sector is moderately concentrated as a whole, with many underconcentrated markets based on international benchmarks, therefore further consolidation is to be expected.
• M&A activity in banking markets of the 15 analysed countries has been increasing in 2018-2019 since it hit the bottom in 2017. In 2019, there were 9 completed deals and 6 ongoing ones as of September 2019, while 2018 saw 16 completed deals. 
• The main reason for the lower number of transactions in the last 2-3 years relative to 2015-2016 was the easing pressure on the banks’ profitability due to the stable macroeconomic environment, vivid lending activity, dismantling of non-performing exposure volumes and entailing profitability improvements, which postponed the imminent need for mergers and acquisitions in the banking sector. However, a number of banks in the CEE banking market have less than 1% or 3% market share, which might not be able to operate profitably in the future amid ongoing consolidation and strengthening consolidators, stringent focus on operational efficiency and digitalization, and a potential economic softening.
• The busiest banking M&A markets of the CEE region in terms of number of transactions were Ukraine (14 transactions), Serbia (11), Poland (10), Romania (10) and Hungary (8) between 2015 and September 2019.
• The most active buyer in the region was the Hungarian OTP Bank (8 transactions), while the second most active buyer was the Polish state, having made 4 acquisitions since 2015 via PZU and Alior Bank.
• The most active sellers in the region were Société Générale (6 transactions), Raiffeisen (5 transactions) and the Greek banks, with Piraeus Bank, National Bank of Greece, Alpha Bank and Eurobank together selling 12 banks between 2015 and September 2019.

For further information please download our latest study.

"Having seen many recent deals from the inside, we see that agenda is there on both sides of the deals. Acquirers have motivation and solid financial firepower to perform acquisitions, while some sellers understand their potential future limitations and might opt for a deal at a fair price. Based on these dynamics, steady deal flow might be expected in the CEE banking M&A market in the forthcoming period also."

- Balázs Bíró, Partner, Regional Financial Services Industry Leader, Financial Advisory