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.

Jeremy Welch
Partner, Deal Advisory Financial Services
KPMG in the UK

Central & Eastern Europe

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. 

Western Europe

  • Luxembourg: Banking groups with private bank subsidiaries whose assets under management fall below critical mass are accelerating their exit. The consolidation of Luxembourg private banking is therefore likely to continue in the foreseeable future. Regulations, digitalization and compliance have indeed escalated the cost to operate for banks with assets under management of less than 10 billion euros (EUR). Regulators and central banks from these groups' home countries have sometimes added further pressures on boards to dispose of activities unrelated core retail banking operations. Luxembourg regulators also favor a higher concentration and merger of smaller private banking operations into larger competitors. More generally, private banks are refocusing their own businesses to serve high/ultra-high net worth individuals, which imply a restructuring of traditional relationship management models to more sophisticated/higher value-added platforms where teamwork with estate planners, asset allocators, tax specialists and private bankers offer higher value-added solutions to demanding clients. Among fund administration and custody banks, there has not been a wave of M&A yet, however these banks currently seek to reinforce their competitive advantage depending on their operating model.
  • Italy: COVID-19 and a potential economic recession may make banks take strengthened capital positions to face a potential second wave of NPEs and associated risk costs. Within this context, the consolidation of mid-size `Popolari' banks, especially in the center/south of the country, is expected. In June 2020, the European Commission has given its green light to the EUR1.6 billion capital increase for Banca Popolare di Bari, which was put under extraordinary administration by the Italian regulatory authority at the end of 2019. The capital increase, expected to be finalized in mid- 2020, will be financed by state-owned Banca del Mezzogiorno-Mediocredito Centrale (MCC) and by the Italian Deposit Guarantee Fund. When looking at large-sized players, in late February 2020, Intesa Sanpaolo, the largest Italian banking group by market capitalization, made an unsolicited EUR4.9 billion public exchange offer for its smaller peer (i.e., the third largest group in Italy), approved by the ECB in June 2020, triggering expectation for further consolidation. Specialty finance challenger-banks are the new model, with a strong potential for superior performance. This new banking model may have the opportunity to acquire market share in the lending space given the new social and economic environment. 
  • France: The consolidation seems to be in its final stages with French banks showing little sign of significant deal activity (apart from HSBC France announcing plans to execute a massive restructure, which is now threatened by the post COVID-19 environment). Despite the stable capital solvency ratio, banks need strong capital positions (especially as they would have to cope with increasing cost of risk post COVID-19), necessitating an exit from some unprofitable businesses, along with cost cutting  -- particularly branch reduction, all of which may offer some M&A opportunities. As banks strive to become more `asset light', they may need to sell non-core businesses. 
  • Germany: Early measures adopted by the German government to deal with the virus might have lessened the overall impact, yet banks still face performance pressures, specifically around profitability. In recent months, a large number of German banks have been charging negative interest rates to large deposit accounts above EUR100,000 and new customers. Additionally due to increasing liquidity constrains in the corporate sector, banks are able to request higher margins for their loans while simultaneously demand for state-guaranteed loans among SMEs is also increasing. German banks are therefore being challenged to complete quick loans assessments of these companies to meet demand. Moreover, German banks still participate with 20 -30 percent on these loan exposures, putting pressure on them to expedite loan applications and inject necessary liquidity into the economy. Banks therefore are being forced to safeguard reputational and future credit risk at the same time. In terms of deal activity, it's too early to evaluate the full impact of COVID-19. Some activities by financial institutions may focus on restructuring, cost-cutting and efficiency improvements through digitization. Disposals would be dependent on whether low-priced assets match sellers' expectations and how hard the financial sector will be hit by rising loan losses in the second half of 2020 and early 2021. Distressed situations could force existing shareholders into mergers or dispose financial assets despite lower prices. On the buy side, interest from financial sponsors is increasing for asset-light financial service businesses, but also for initial distressed situations. However, the number of attractive assets is still limited. 
  • Spain: The consolidation of former savings banks is expected while capital-generating transactions could be an initial step toward bank mergers. 
  • Switzerland: There is a continued need for consolidation, as several private banks are performing below par and struggling to significantly improve. This may be accelerated by COVID-19. The retail banking sector looks stable, however negative interest rates and shrinking margins in the mortgage business could have an adverse impact on long-term performance, opening up deal opportunities. The impact of COVID-19 on the real estate market and on SMEs may still lead to credit losses in some retail banks. Any impact however is expected to be minimal.

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