“The economics of international bank M&A continue to be challenging. Cost synergies are much more limited given the lack of overlapping distribution networks, and the potential for regulatory ring-fencing limits funding cost synergies,” said Marco Troiano, head of financial institutions. “Also, the European Banking Union remains incomplete, which restricts the fungibility of capital and liquidity across borders.”

Troiano believes, though, that there is still room for domestic consolidation. “Domestic deals hold greater potential for value creation thanks to cost synergies both in physical distribution and in overlapping centralized functions. Revenue synergies are also achievable as domestic deals come with improved market and pricing power on top of cross-selling opportunities, while funding synergies are not hindered by jurisdictional ringfencing,” he said.

Domestic deals also tend to carry fewer integration risks than cross border deals, thanks to a closer cultural alignment between merging entities, greater knowledge of the market and lower risk of political interference.

The French market is already at an advanced state of consolidation, with six large banking groups dominating the retail market. Any deal between them is unlikely given complex governance arrangements, so French banks have been looking for growth opportunities outside of France and are among the most diversified in Continental Europe. Their recent activity points to well thought-out bolt-on deals in markets in which they are already present, such as Italy, rather than aggressive entries into new markets.

The UK banking sector is moderately concentrated but not to the extent that it excludes further consolidation. “Bolt-on domestic deals are still possible for the top five banks if they present strong industrial and financial rationales. We also believe deals are possible between building societies and within the space occupied by challenger banks and fintechs,” Troiano said. Recent activity points to the larger building societies having an appetite to increase their scale.

In Spain, BBVA’s bid for Banco de Sabadell is testament to the attractiveness of the Spanish market, which with its consolidated structure, largely retail customer bases and the country’s strong economic performance, which offers potential for sustainably high returns. Beyond BBVA-Sabadell, room for further transformational deals is limited, as the sector is barbelled, with mega banks at one end (Santander, BBVA, CaixaBank) and regional institutions at the other.

“But we do not exclude further consolidation among the former regional savings banks, as they struggle to match the digital service offerings of larger competitors. At the same time, the relevance of regional savings banks remains an enduring characteristic of the sector. With the recent lift off in margins and profitability, there is no immediate pressure to consolidate,” Troiano said.

The Italian sector is similarly barbelled, with Banca Intesa Sanpaolo and UniCredit dominating the market. “However, here we see greater room for consolidation, especially among medium-sized groups, and this could eventually lead to the emergence of a third major group,” Troiano said. “The Italian banking sector remains one of the most fragmented in Europe.”

Germany’s three-pillar banking system offers very distinct M&A potential for the respective sectors. In the private sector, M&A speculation centres on Deutsche Bank and Commerzbank or a possible transaction involving both. A transaction was rejected in 2019, as the execution risks for all large bank mergers remain significant. Nevertheless, we believe an in-market transaction is still the safer option compared to a riskier cross-border transaction.

Another area for consolidation is the savings bank sector (SFG). “Even if the idea of a ‘super Landesbank’ is off the table for the time being, we consider the current Landesbank system to be too fragmented and ultimately responsible for the sector’s below-average profitability,” Troiano said.

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