With the banking sector receiving much notice from investors due to recent IPOs and takeovers, we decided to compare what drives investments into the regional banking sector and how do these trends compare to global ones.
In 2018, the global banking M&A environment seemed to be headed in two opposite directions, as the number of deals witnessed a slowdown whilst the value of those deals was on the rise. Meanwhile, domestic deals continue to dominate, making up three‑quarters of all activity and setting a theme of consolidation throughout the world.
According to KPMG’s global banking M&A trends study, the US, India, China, and the UK remain the most targeted economies. Note, however, that China’s domestic deal activity has calmed somewhat in line with economic growth, while the US has yet to see anticipated deal upturns arising from regulatory relief. India, on the other hand, enjoyed a 22% increase in deal volume during 2018 driven by market consolidation and an increase in investments by private equity investors and sovereign wealth funds. However, political instability caused by ongoing trade and tariff negotiations — including Brexit and US-China trade disputes remains a threat to delivering the required shareholder value.
In the US, rising interest rates will be an important trigger as more buyers are looking for attractive deposit franchises as the competition for deposits continues to increase and deposit betas accelerate. With the largest banks growing their deposit market share via organic customer acquisition, the next tier is under pressure to further expand markets and increase assets. Larger regional banks are trying to develop through acquisition, ramping up their corporate development teams to make depository as well as fee‑based deals. Amongst the key potential targets are rural banks with a secured deposit base, especially those with significant mass. According to KPMG, an increase in the volume of larger transactions in the US can be expected in 2019. Note that much of it will be driven by institutions that have not done sizeable deals over the last 5–10 years.
Meanwhile in Western Europe, recent consolidation has been in small bank segments, particularly in countries with many small cooperative banks, like Germany and Italy. In Italy, the largest banks have almost completed restructuring/reorganization and are ready to speed up consolidation in 2019. Those Italian cooperative banks that are based on a mutual model are either moving towards creating a banking group or alternative schemes based on mutual protection, which should further strengthen the sector.
Multiples of Top Core Banking Deals in 2018
Source: Mergermarket, KPMG Global banking M&A trends 2019
When looking at the most recent transactions, which occurred in the regional banking sector, one could easily believe that all banks in the region were state-owned. Therefore, we recently witnessed the sale of two Slovenian state-owned banks (NLB & Abanka), while Serbia is on a steady road to sell their share in Komercijalna Banka, as well. To read more about the sale of Abanka please refer to our news here. One should also add that the Romanian state-owned Eximbank purchased a 99.28% in Banca Romaneasca from the National Bank of Greece for an undisclosed amount. As a reminder, the National Bank of Greece has been trying to sell Banca Romaneasca for more than three years now, and the previous attempt ended in failure after Romania’s central bank did not approve the sale to Hungary’s OTP.
There are several possible reasons for the recent boost in interest for regional banks. First, one should highlight the improving macro surrounding in the region which plays into the hand of banks. Secondly, local banks offer a significant discount to their book value which ought to make them attractive acquisition targets.
Regional Banks P/E
Regional Banks P/B
Source: Bloomberg, InterCapital Research
Finally, banks have been working on their NPL portfolio cleansing which goes hand in hand with the regional markets’ overall reduction in NPLs. To read more about the situation in Croatia and Slovenia please click here.