The average size of deals between European banks hit a 12-year high in 2020, a trend that dealmakers expect to accelerate this year as the industry seeks greater scale to compete with bigger US rivals.
The bulk of European deals in 2020 were struck between domestic competitors, as the continent’s lenders turned to consolidation to cope with negative interest rates and the economic disruption unleashed by the pandemic.
Last year’s signature deal came in July, when Intesa Sanpaolo became Italy’s largest bank by assets through buying domestic rival UBI for €4.2bn. It was the biggest European bank transaction since the financial crisis.
Further domestic consolidation is expected this year, with more transformative cross-border unions forecast to follow.
“In-market consolidation is a more likely and an easier first step, as we have seen in 2020, even though the industrial logic of more pan-European deals may be sound,” said Guillermo Baygual, co-head of mergers and acquisitions for Emea at JPMorgan Chase.
“Once we see the right conditions emerge in Europe, including more harmonised regulation, then cross-border deals will make more sense,” Mr Baygual added.
According to data provider Dealogic, the average value of the 27 M&A deals between European banks announced last year hit $477m, up from just $74m the year before and the highest since the financial crisis erupted in 2008.
While the volume of transactions was down on recent years, the significant increase in the deal size reflected banks beginning to shift their focus from bolt-on acquisitions to transformational deals.
Europe’s banking market has long been seen as too fragmented, with low interest rates hitting profitability and adding to the pressure to cut costs. Regulators and policymakers have urged banks to consider combining to improve economies of scale.
Last summer, the European Central Bank sought to prompt further consolidation by saying it would recognise an accounting gain — known as badwill — that can be generated when a bank buys a rival for less than the fair value of its assets minus its liabilities.
Intesa said one of the main attractions of the UBI transaction was the badwill it would gain. Alongside Italy, Spain has also seen an increase in dealmaking. In September, CaixaBank agreed to buy Bankia in a $5.1bn deal, and last month Unicaja launched a $928m bid for smaller rival Liberbank.
Slow progress in implementing a European banking union has so far held up cross-border deals. But industry executives believe the coronavirus pandemic has made such transactions more likely.
“I would expect to see some bolder cross-border consolidation emerging in the second half of the year as banks get comfortable with the impact the pandemic has had on their balance sheets,” said Nigel Moden, banking and capital markets leader for Emea at EY, the consultancy.
“The sector generally remains very well capitalised but the last 12 months has favoured scale players so expect to see them looking for well-priced acquisitions as we move into the summer months,” he added.
Cap Expand Partners sharing news from: www.ft.com