Western European deal volume is likely to suffer reflecting a fall in confidence and economic activity associated with COVID-19. M&A activity in Central & Eastern Europe may experience a slowdown as regulators appear reluctant to approve transactions.
In the UK, economic uncertainty associated with the fallout of COVID-19 will replace election uncertainty and Brexit uncertainty as key factors dampening deal volume. There will, however, be opportunities for deals, in particular amongst fintech and non-bank lenders where the market may see distressed assets. In the fintech market, reduction in valuations for recent entrants may increase the level of interest from incumbent banks, who see an opportunity to acquire technology and customer bases to enhance their proposition. Meanwhile, the pressures that have pushed towards consolidation within the mid-tier banks — in particular reduced profitability in mortgage lending — as a result of the combination of ring-fencing rules creating excess liquidity and low swap rates will not disappear. Once COVID-19-related uncertainty dissipates, sector consolidation opportunities will return.
For the second time in 10 years European lenders will undergo a profound stress and, as before, this will create M&A opportunities for growth, consolidation and distress combined with the need for accelerated digital transformation and the necessary but market-distorting effects of government intention.
The CEE banking sector outlook has turned negative due to COVID-19. Banks' profitability may be impacted while liquidity is unlikely to come under pressure as buffers are substantial. Large banks in the region are less vulnerable as compared to small lenders and microfinance companies. A slowdown in new lending, higher risk costs, margin pressure from lower interest rates and exchange rate fluctuations (in some jurisdictions) is expected to adversely impact the profitability of traditional incumbents. Several large banks are also likely to record a slowdown in their progress in resolving legacy asset quality issues. The deal environment will likely be subdued during the next six months and a decline in volume of transactions is expected across all countries in the region Reputable players with a non-strategic position planning exit are expected to temporarily pause their plans.
Currently, prospective buyers have great difficulties pricing assets; hence deals are halted as long as the impact of COVID-19 becomes clearer. The completion of already signed deals has become a challenge as buyers are focusing more on capital preservation and regulators are appearing reluctant to approve transactions in the current climate. Fintechs are likely to face funding issues, too, yet players in non-lending areas such as payments, e-commerce and compliance are expected to see a surge in product demand as clients go deep on digital.