CEE Banking M&A Study 2020 

About the study

We are happy to hereby release the 3rd edition of our CEE banking M&A study. This year however differs significantly from the former two, as those editions were depicting a well-performing CEE banking sector with positive outlook, fuelled by strong economic performance, while by now CEE banks face massive challenges triggered by the global COVID-19 pandemic. The real damage is to be visible from the 2020 financial figures, however there is no doubt that COVID-19 is having a painful footprint on CEE banking performance.

COVID-19 found the CEE banking sector in a solid condition. Average capital adequacy was 20% in 2019, NPL metrics already relatively low and further melting, with average ROE of 12.7%. These figures are to markedly worsen due to the ongoing turbulence, posing severe challenges to banking managements and shareholders.

Consolidation has already been onging in the fragmented CEE banking sector, a number of deal were made in recent years, with non-strategic CEE players exiting or rationalizing, in tandem with strong acquisition appetite from core CEE players. In last year`s foreword we projected that the expected economic softening might put more pressure on less efficient banks. 2020 however is not seeing economic softening, but a massive recession on the back of a global crisis. Amid such sour conditions, weighing heavily on banking profitability and capital positions, smaller and less solid players might not be able to cope with the challenges alone. Robustness, shock absorption capacity, economies of scale and operational efficiency are to become even more vital, where larger, more diversified banking groups might come to a position to selectively acquire other weakened banks.

Key findings:

• CEE banks entered into the COVID-19 crisis in a strong capital position. The capital adequacy ratio (CAR) remained stable at an average 20.0% level in 2019, increasing by 0.2% point compared to 2018.
• The CEE region’s average profitability was sound in 2019 as ROE stood at 12.7% while ROA at 1.5%. While in the majority of the analysed countries the profitability ratios remained on the same level or slightly decreased, extreme high ROE of 33.5% reported in Ukraine boosted the average. These high profitability levels are not to remain, as COVID-19 is to put a severe pressure on them.
  
• Almost 60% of total assets was held by the top 15 banking groups in the region. In terms of assets, the largest banking group in the region is still Erste Group (8.7% market share, 8 countries), followed by KBC Group (7.8% market share, 4 countries) and UniCredit Group (6.5% market share, 9 countries). The Hungarian OTP Group experienced the highest CEE banking asset growth due to its expansive M&A strategy in the recent years.
  
• The average total NPL ratio for the CEE region was 7.2% in 2019, which is 0.75% point lower than in 2018, with the economic expansion and continuous portfolio cleaning activities of the banks encouraged by the regulatory bodies being the main reasons behind the improved ratios. Overall, the CEE banking sector’s NPL ratios stood at historical low levels at the end of 2019, which put the regional banking sector in a relatively favorable position to face the economic challenges and portfolio quality hits triggered by the COVID-19 pandemic.
• The outlook of banks’ asset quality in the forthcoming period is highly dependent on the combination of economic recovery and continued government support. Since the outbreak of the pandemic, the state support policies have been playing a crucial role in stabilising banks’ asset quality. However, even a premature withdrawal of government supports could lead to sharply increasing default rates in the upcoming period. The regulators encourage the early identification and provisioning of NPLs, which are likely to contribute to close monitoring and successful subsequent disposals.
• Therefore, such pandemic related regulatory measures (e.g. loan moratoriums, selective easements to banks) to safeguard the economy might to a certain extent temporarily mask the real economic damage incurred, however future negative effects on portfolio quality and earnings of the banks are expected to be massive.
• The busiest banking M&A markets of the CEE region in terms of number of transactions were the Baltics (6 transactions), Serbia (4 transactions), Czech Republic (3 transactions) and Romania (3 transactions) between 2019 and September 2020.
• The most active buyers in the region were the Hungarian OTP Bank (3 transactions) and the KBC Group, (2 acquisitions) between 2019 and September 2020. 
• The most active sellers in the region were Société Générale (4 transactions), Danske Bank (2 transactions, 1 ongoing transaction) and Piraeus Bank (2 transacions) between 2019 and September 2020. 
• Over the past years banks in the CEE region posted outstanding performance on the back of the stable macroeconomic environment. However, the COVID-19 pandemic disrupted this favourable upward trend in the first half of 2020, weighing on profitability and capital adequacy. Amid the economic shock where robustness is paramount, the CEE banking sector is still very fragmented with a number of marginal players with practically insignificant market share. As smaller, less efficient and robust players might not be able to weather the shock alone amid profitability and capital challenges, we expect the consolidation trend to continue in the following years, even accelerated by the COVID-19 crisis.