Headline Open Sans Bold Subheading Open Sans CEE banks facing challenging times Light up to two lines of text Economic turbulence to boost consolidation Subtitle or date subtitle,December date 2020 or author second line 02 Contents Foreword 04 Number of M&A deals in the CEE region (2015 – September 2020) 06 CEE macroeconomic overview 08 Banking trends in CEE 09 Evolution of NPL in the CEE region 17 Banking M&A Dynamics in CEE 20 COVID-19 impact on CEE Banking Sector 26 Poland 30 The Czech Republic 36 Slovakia 40 Hungary 44 Romania 50 Slovenia 56 Croatia 60 Bulgaria 64 Serbia 68 Ukraine 74 Bosnia and Herzegovina 80 Albania 84 Baltic region (Estonia, Latvia, Lithuania) 88 Kosovo 102 List of abbreviations 106 Contacts 107 03 Foreword We are happy to hereby release the 3rd Consolidation has already been ongoing We have been actively supporting our edition of our CEE banking M&A study. in the fragmented CEE banking sector, a clients in the recent consolidation, and This year however differs significantly from number of deals were made in recent years, having liaised with banking executives the former two, as those editions were with non-strategic CEE players exiting we see that market players are now depicting a well-performing CEE banking or rationalizing, in tandem with strong waiting to see the real effects of the sector with positive outlook, fuelled by acquisition appetite from core CEE players. COVID-19 crisis with the gradual phasing strong economic performance, while by In last year`s foreword we projected that out of moratorium regimes. However the now CEE banks face massive challenges the expected economic softening might forthcoming period is to uncover the actual triggered by the global COVID-19 pandemic. put more pressure on less efficient banks. damage, which is expected to further spur The real damage is to be visible from the 2020 however is not seeing economic consolidation in the CEE banking market. 2020 financial figures, however there is no softening, but a massive recession on the doubt that COVID-19 is having a painful back of a global crisis. Amid such sour footprint on CEE banking performance. conditions, weighing heavily on banking profitability and capital positions, smaller COVID-19 found the CEE banking sector in and less solid players might not be a solid condition. Average capital adequacy able to cope with the challenges alone. Balázs Bíró was 20% in 2019, NPL metrics already Robustness, shock absorption capacity, Partner, Regional Financial relatively low and further melting, with economies of scale and operational Services Industry Leader average ROE of 12.7%. These figures are efficiency are to become even more vital, Financial Advisory to markedly worsen due to the ongoing where larger, more diversified banking turbulence, posing severe challenges to groups might come to a position to banking managements and shareholders. selectively acquire other weakened banks. 04 ADVI A SO & EA L CO D UN R Y T M B C E E # P N 1 M T O R R 0 E A U 2 R L E 0 G AN N 2 E D TER R EAS 1 M H A & R 9 KE 01 T, 2018 & 2 #1 M&A advisor in Central Europe pursuant to the number of #1 Accounting / Due Diligence Firm at the International M&A transactions (Mergermarket, 2006, 2007, 2008, 2009 and 2010, Awards by M&A Advisor, 2011 2018, 2019, 2020H1) Professional Services Firm of the Year (April 2011) Private Equity #1 M&A advisor in terms of the 4 biggest advisory firms - Big Awards 2011 4 (Mergermarket, 2006, 2007, 2008, 2009 and 2010, 2018, Ranked #1 in global consulting by Gartner for the third 2019H1, 2020H1) consecutive year, 2013 Global M&A Advisor Award of the year 2009 by M&A Advisor M&A ADVISORY LEAGUE TABLE (2020 H1) CEE EUROPE GLOBAL # Company name Deal count # Company name Deal count # Company name Deal count 1 Deloitte 11 1 Deloitte 117 1 Deloitte 187 2 PwC 10 2 PwC 100 2 PwC 166 3 VTB Capital AO 9 3 EY 96 3 KPMG 130 4 EY 8 4 KPMG 95 4 EY 130 5 Citi 4 5 Rothschild & Co 75 5 Goldman Sachs & Co 103 6 UBS Investment Bank 4 6 JPMorgan 53 6 JPMorgan 103 7 KPMG 4 7 Goldman Sachs & Co 41 7 Morgan Stanley 95 8 Clairfield Inernational 3 8 Bank of America 38 8 Rothschild & Co 88 9 SUMMA Advisers 3 9 Morgan Stanley 36 9 Bank of America 85 10 JPMorgan 2 10 Lazard 36 10 Houlihan Lokey 80 Source: Mergermarket Global & Regional M&A Report 1H20 05 Number of M&A deals in the CEE region (2015 – September 2020) 14 10 5 16 2 10 7 5 12 3 13 0 6 4 06 Ukraine 16 Baltic Region 14 Serbia 13 14 Romania 12 Poland 10 Hungary 10 Slovenia 7 10 Bulgaria 6 Croatia 5 5 Czech Republic 5 16 2 Albania 5 Bosnia and 3 10 Herzegovina 7 Slovakia 2 5 12 Kosovo 0 3 13 0 6 4 07 CEE macroeconomic overview The CEE region experienced remarkable achieved in Hungary (4.9%), Estonia (4.3%) due to the outbreak of the global COVID-19 economic progress in the past years, with and Serbia (4.2%) in 2019. Growth was pandemic. Economic forecasts predict an the average real GDP growth rate being driven by an increasing domestic demand average GDP decline of 5.8% in the region above 3% per annum in the last five years. fuelled by improving labour market with Croatia (-8.6%), Slovakia (-8.2%) and 2019 saw a moderate decrease in average conditions and favourable consumer prices Serbia (-7.2%) experiencing the greatest real GDP growth, to 3.4% from 4.0% in across Europe. This period of impressive decrease. 2018. The highest growth rates were growth however is to come to a halt in 2020 Figure 1. Changes in real GDP, 2018-2020E 6.0% 4.0% 3.4% 2.0% 0.0% -2.0% -4.0% -6.0% -5.8% -8.0% PL CZ SK HU RO SI HR BG RS EE LV LT AL BH UA XK 2018 2019 2020E Average - 2019 Average - 2020E Source: EIU, National Banks On average, the unemployment rate in 2019. In 2020, an average increase most countries have already experienced decreased by 0.9% point from 8.8% of unemployment rate by 1.5% point is an increase in unemployment rate together to 7.9% in 2019 considering all the 16 expected, with Estonia and Latvia with a climbing inflation because of the countries. Kosovo recorded the highest recording highest increase (3.8% and economic shock and uncertainty due to the unemployment rate (25.7%) in the region 3.7% points respectively). In 2020 Q3 coronavirus outbreak. Figure 2. Unemployment rate, 2018-2020E 30.0% 25.0% 20.0% 15.0% 10.0% 8.1% 7.9% 5.0% 0.0% PL CZ SK HU RO SI HR BG RS EE LV LT AL BH UA XK 2018 2019 2020E Average - 2019 Average - 2020E Source: EIU, National Banks Note: expected unepmloyement rate in 2020 for Bosnia and Herzegovina and Kosovo is not available 08 Banking trends in CEE Between 2017 and 2019 banks in the CEE In the past few years, asset quality Total assets grew by 8.6% on average among region experienced outstanding years due continued its improving trend with the analysed countries, reaching EUR 1,503 to the stable macroeconomic environment. decreasing NPL ratios, while profitability bn by the end of 2019. The two largest However, the COVID-19 pandemic ratios increased and capital adequacy markets, the Polish and Czech banking disrupted this favourable upward trend in remained solid. The increasing sectors contributed with EUR 474 bn and EUR the first half of 2020, bringing down both lending activity fuelled by a favourable 287 bn, respectively. profitability and solvency ratios in most of macroeconomic environment resulted the countries. in high profits in almost every analysed The CEE region experienced a slightly country. stronger growth in banking assets than in GDP in 2019, which caused a 3% point increase in the average banking asset penetration ratio to 90%. Figure 3. Banking Assets to GDP, 2017-2019 140.0% 120.0% 100.0% 89.0% 86.0% 80.0% 60.0% 40.0% 20.0% 0.0% PL CZ SK HU RO SI HR BG RS EE LV LT AL BH UA XK 2017 2018 2019 Average - 2018 Average - 2019 Source: ECB CBD, National banks The total consolidated assets of the Herzegovina, Albania, Ukraine and Kosovo, In the past years, the analysed countries banking sector and the country’s nominal for which countries higher potential future demonstrated a significant shift towards GDP shows a strong positive correlation. growth is expected. Slovakia, Hungary, the high-penetrated direction due to In terms of banking penetration, the CEE Poland, Croatia, Lithuania and Latvia the improving standards of living and banking sector can be categorized into belong to the medium-penetrated group, expanding banking markets. This is three major groups. The first group is while Slovenia, Czech Republic and Estonia especially true for countries in the in the the lower-penetrated group consisting form the high-penetrated group. lower-penetrated group such as Bosnia of Romania, Bulgaria, Serbia, Bosnia and and Herzegovina, Kosovo and Serbia. 09 Figure 4. Banking market penetration to GDP per capita, 2019 30 High penetration 25 Medium penetration SI 45.7 EE 37.6 CZ 20 286.5 SK LT 86.3 ) 30.7 s LV h t 22.1 Lower penetration R 15 HU U 142.6 E ( a HR t i 67.3 p PL a RO 474.3 c 106.8 r e p 10 P BG D 58.9 G RS 12.1 5 BH AL 18.4 UA 34.7 56.6 XK 4.8 0 0 5 10 15 20 25 30 Total Assets per capita (EUR ths) Source: ECB CBD, National banks Note: Bubble size: total assets volume in 2019 (EUR bn) Overall, banks’ capitalisation were well requirements for housing loans and the above the regulatory minimum at the operational change of Luminor, which end of 2019, as the capital adequacy ratio moved its headquarters to Estonia.