"We have got to face reality, the world has changed”—what is driving M&A in European banks?

30 March

"We have got to face reality, the world has changed”—what is driving M&A in European banks?

Banks have largely taken the pandemic’s economic impact in their stride, as stimulus measures have held off any spike in default rates, but meagre interest rates mean that margins on loans continue to be squeezed.

At the same time, bankruptcies and the volume of non-performing loans are likely to rise as those stimulus measures taper off, forcing lenders to take action and avoid being caught short.

All of this, coupled with long-term structural pressures, is driving the highest rates of M&A activity seen in the financial services sector in more than a decade—aggregate deal value in 2020 totalled €97.2 billion, more than double the 2019 total and the highest annual deal figure in the sector since 2008. And around 10% of this is attributable to divestment activity.

Harbinger of boom

HSBC is a harbinger of what's to come—Europe's largest bank is in the final stages of selling its 270-branch French retail banking arm to US private equity firm Cerberus Capital Management, potentially for a nominal fee. It’s also seeking a buyer for its 150-branch US retail banking operations.

"We have got to face reality, the world has changed," HSBC chief executive Noel Quinn recently told the Financial Times, noting that real estate costs will have to come down amid the challenging interest rate environment and rapid digital development.

In Spain, Banco Sabadell was looking to raise some £1.7 billion by offloading TSB, after it called off a planned merger with rival BBVA in November 2020. In March 2021, the plan to jettison TSB was postponed, indicating a possible deal later this year or in 2022. Sabadell Mexico may also be lined up for a potential sale that could bring in €600 million.

Also in Spain, Bankinter won regulatory approval in late March 2021 for the divestiture of an 82.6% stake in its insurance business, Linea Direct, which is expected to fetch in the region of €1.2 billion.

Equal stakes

Alongside fundraising and avoiding potential default downfalls, banks across Europe are also hunting for ways to improve operational efficiencies and improve return on capital, as well as financing digitalisation programmes—all of which is spurring mergers of equals as well as a round of major takeovers.

In March 2021, CaixaBank and Bankia closed their €4.3 billion tie-up, creating the largest player in the Spanish market. Meanwhile, in July 2020, Intesa Sanpaolo concluded its €5.5 billion takeover of UBI Banca, similarly creating the largest banking group in Italy.

Europe's banks are still in the early stages of this journey, so expect high levels of M&A to be the norm.