Bank M&A in central, southeast Europe set to pick up in the next few years

Consolidation among central and southeast Europe's banks is likely in the medium term, as smaller lenders evaluate their options in a challenging environment.

Analysts and banks point to tighter capital requirements, digitalization and an expected economic slowdown as factors that will drive more mergers over the coming year or two. So far in 2023, bank deal activity in the region has been lackluster, S&P Global Market Intelligence data shows.

More bank deals could materialize within 12 to 24 months, Raiffeisen Research analysts Gunter Deuber and Jovan Sikimic told Market Intelligence. "We see some core players dedicated to further strengthening their position in core markets," they said.

Complex regulation and the evolution of the banking industry, driven particularly by digitalization and the prevention of cybercrime, is making smaller banks' business models less competitive, a spokesperson for Slovenia-based Nova Ljubljanska Banka dd told Market Intelligence. Such lenders are thus reevaluating their strategies, the bank said.

Meanwhile, tighter conditions on European financial markets following turbulence created by recent bank failures in the US and the problems of Credit Suisse Group AG might put further pressure on smaller lenders, the Raiffeisen Research analysts said.

M&A lull

In the first quarter of 2023, bank M&A activity including majority stake purchases, minority acquisitions and asset/branch takeovers was at its lowest level since at least 2018, Market Intelligence data shows, with just two deals announced.

The Romanian unit of Erste Group Bank AG agreed to sell its Moldovan subsidiary to B.C. Victoriabank SA, controlled by another Romanian lender, Banca Transilvania SA. Greece's Eurobank SA announced the sale of its Serbian subsidiary to AIK Banka a.d. Belgrade.

Meanwhile, citing a lack of scale, BNP Paribas SA unit BNP Paribas Personal Finance SA recently announced withdrawals from the Czech Republic and Romania. Erste's Czech unit Ceská sporitelna a.s. is reportedly interested in taking BNP Paribas Personal Finance's local business.

In the first quarter of 2022, the far higher number of deals was driven by the start of the war in Ukraine and the subsequent pushout of several Russian players, including Sberbank of Russia, from markets in Central and Southeast Europe.

Deal activity will likely be constrained in the next two quarters as banks' valuations remain elevated in the high interest rate environment, and risk related to bank taxes in various countries dissuades buyers, the Raiffeisen Research analysts said. But more M&A could happen once inflation and interest rates start to normalize, they said.

M&A destinations

Hungary-based OTP Bank Nyrt. has been the most active buyer in the region in the last five years, Market Intelligence data showed. The Hungarian lender recently purchased Slovenia-based Nova Kreditna Banka Maribor dd and is now in the process of acquiring Uzbekistan-based Joint Stock Commercial Mortgage Bank Ipoteka Bank. OTP did not respond to Market Intelligence's request for comments.

Austria's Erste Group Bank has also been active in the M&A banking space in the region. It has bought loan portfolios and new business lines in some key markets, including the Czech Republic and Hungary.

"We will continue to explore opportunities for bolt-on acquisitions and look at relevant M&A opportunities that may arise in markets [where we operate]," Erste said. Its core markets include Austria, the Czech Republic, Slovakia, Hungary, Romania, Croatia and Serbia.

Meanwhile, Slovenia's Nova Ljubljanska Banka told Market Intelligence it is interested in expanding in southeast Europe.

"NLB has the capacity to grow by acquisition in any of our existing, as well as neighboring, markets," a spokesperson for the bank told Market Intelligence. "We have acquisition potential to take over M&A targets with up to €2 billion weighted assets."

With Slovenia and Serbia as key markets, NLB said it would also like to enter Croatia, and that entering Albania "is a mid-to-long-term aspiration." NLB is currently not allowed to enter the market in Croatia due to a political agreement between Slovenia and Croatia.

NLB is also considering bolt-on acquisitions, particularly in the leasing segment.

In Poland, a number of factors, including MREL requirements that will kick in from 2024 and the sensitivity of banks' results to an economic slowdown, could increase the risk of forced mergers and acquisitions of financial institutions with weaker capital, Noble Securities analyst Sobiesław Kozłowski told Market Intelligence.

With low valuations of Polish banks, M&A prospects in the country could also improve after the 2023 parliamentary elections, the materialization of the banking sector-related risk factors and the expected global improvement in sentiment toward emerging markets, Kozłowski said. The sale of VeloBank SA — a lender that was created following the forced restructuring of Getin Noble Bank — is planned by Poland's Bank Guarantee Fund in March 2024.

Poland's largest bank, PKO Bank Polski SA, is on the lookout for deals, recently telling news agency PAP that it is actively monitoring the market for potential acquisitions. It did not respond to a request for comment.

The Czech Republic and Romania are the most attractive from the perspective of larger M&A deals in the banking sector, while Hungary is currently the least attractive market in the region due to the existing bank tax regimen, politics and "massive macro volatility," according to the Raiffeisen Research analysts.

AIK Banka, Banca Transilvania, Raiffeisen Bank International AG and KBC Group NV, which have also been involved in M&A transactions in the central and southeast European region in recent years, did not respond to requests for comments.