CEE banking consolidation perking up Dealmakers with agenda on both sides November 2019 Contents Foreword 1 Number of M&A deals in the CEE Region 2 CEE macroeconomic overview 4 Banking trends in CEE 5 Banking M&A dynamics in CEE 12 Digital transformation, FinTech 18 Poland 22 Czech Republic 26 Slovakia 30 Hungary 34 Romania 38 Slovenia 42 Croatia 46 Bulgaria 50 Serbia 54 Ukraine 58 Bosnia and Herzegovina 64 Albania 68 Baltic region (Estonia, Latvia, Lithuania) 72 List of abbreviations 83 Disclaimer 83 Contacts 84 For more details behind the study, use the QR scenner on the last page 2 Foreword remained solid with an average over 20% therefore with no efficient economies of in the 15 countries, NPL ratios and volumes scale. The expected economic softening gravitated further to the south, while might also put more pressure on less profitability rose to historically high levels efficient banks. Consolidation seems to in several countries with an average ROE be perking up with an increasing number around 11% and no loss making banking of deals. We have seen many recent Leveraging on the success of our NPL sectors. These positive dynamics were deals from the inside, therefore we see study series which provides an overview backed by stable economic expansion with that agenda is there on both sides of the on non-performing loan markets in 15 an average real GDP growth of 3.9% in deals, and acquirers have solid financial countries across CEE and the Baltics, 2018, improving labour market conditions firepower to perform acquisitions. as a leading advisor not only in loan and intense lending activity in the region. Based on all the above, steady deal flow portfolio but banking entity deals as might be expected in the CEE banking well, last year we decided to introduce Besides ongoing digital transformation, market in the forthcoming period also. a new study on banking M&A dynamics another prevailing trend in the regional with the same geographical scope, which banking sector is the consolidation of to our great pleasure was very well the banking market, driven by non-core received by the market. Therefore, we exits on the sell side and acquisitive are hereby issuing the second edition growth on the buy side by core regional of our CEE banking M&A study. players to increase economies of scale and boost efficiency. Multiple banking Balázs Bíró Performance of the banking industry sectors in the region are overbanked with Partner, Regional Financial in the CEE and Baltics continued being a fragmented market structure and a Services Industry Leader reassuring. Capital adequacy ratios in 2018 number of banks with low market shares, Financial Advisory 1 Number of M&A deals in the CEE region (2015 – September 2019) 3 5 2 10 3 14 1 8 6 5 10 1 11 6 4 2 Ukraine 14 Serbia 11 Poland 10 3 Romania 10 Hungary 8 5 Bulgaria 6 2 Slovenia 6 Croatia 5 10 Latvia 5 Albania 4 3 14 Czech Republic 3 1 Estonia 3 8 Lithuania 2 6 5 10 Bosnia and 1 Herzegovina 1 11 Slovakia 1 6 4 3 CEE macroeconomic overview From a macroeconomic perspective, In 2018, the average real GDP growth was the negative real interest rates and the although several strong Western economies 3.9% in the analysed 15 regional countries. depreciating Hungarian currency. While have shown signs of an economic downturn The highest growth rate was reported in in Latvia, the robust GDP growth was recently, the CEE region’s economies Poland (5.1%), Hungary (5.0%) and Latvia driven by the continuously high domestic continued performing well in 2018, (5.0%). The key growth factors in Poland demand. Similarly, other countries of the practically at the same growth pace as in were the strong labour market and the CEE region experienced robust growth 2017. However, there are expectations that accelerating level of private consumptions. in the domestic consumption due to the 2019 might see some economic softening as In Hungary, the main GDP growth drivers improving labour market conditions. weaker Western performance is to have its were the increasing public investments, effect in CEE as well. the advance payments of EU funds, Figure 1. Changes in real GDP, 2016 - 2018 8.0% 7.0% 6.0% 5.0% 4.0% 4.0% 3.9% 3.0% 2.0% 1.0% 0.0% PL CZ SK HU RO SI HR BG RS UA BH AL EE LV LT 2016 2017 2018 Average - 2017 Average - 2018 Source: EIU All the regional countries recorded lower In the region average unemployment rate unemployment rate in 2018 than in the decreased by 1.2 percentage point, reaching 8.6%. previous year. The highest improvement The region’s labour conditions have generally was achieved by Croatia, Serbia and Slovakia improved with real wage rises in the majority of the with a 2.6-, 2.3- and 1.6-percentage point countries and the continuation of the decreasing decline in unemployment rate, respectively. unemployment rate trend. Figure 2. Unemployment rate, 2016 - 2018 40% 35% 30% 25% 20% 15% 10% 9.8% 8.6% 5% 0% PL CZ SK HU RO SI HR BG RS UA BH AL EE LV LT 2016 2017 2018 Average - 2017 Average - 2018 Source: EIU 4 Banking trends in CEE The year of 2018, similarly to 2017, was an improved with continuously decreasing digital banking transformation is ongoing exceptional year for the regional banking NPL ratios. Although banks face profitability in the CEE region, which is inevitable for sector. Profitability recovered attractively challenges in the current low interest future competitiveness and success of in the recent years, and the majority of rate environment, it also helped banks to banks. the analysed 15 countries experienced a increase their lending volumes in all of the positive change in consolidated profitability 15 analysed countries. At the same time, In 2018, the CEE region experienced a ratios. long-term efficiency improvements have slightly weaker growth in banking assets become one of the main challenges of the than in the GDP, which caused an almost The impact of the economic softening was banking sector to improve profitability, four-percentage point decrease in the not experienced in the banking sectors of for which digitalization is inevitable. Thus, average asset penetration ratio for the CEE the CEE region yet, since the profitability the major banking groups have started to banking sector 88.6, which is not rejoicing ratios remained high, the capital adequacy follow the digitalization trends, set their for the CEE banking market. ratios remained stable, and asset quality digitalization strategies, and therefore Figure 3. Banking assets to GDP, 2016 - 2018 140% 120% 100% 92.3% 88.6% 80% 60% 40% 20% 0% PL CZ SK HU RO SI HR BG RS UA BH AL EE LV LT 2016 2017 2018 Average - 2017 Average - 2018 Source: ECB CBD, Eurostat There is a strong positive correlation to the lower-penetrated group, where between the total consolidated assets higher potential future growth is expected. of the banking sector and the country’s The medium-penetrated group consists nominal GDP. In terms of banking of Slovakia, Hungary, Poland, Croatia, penetration, the CEE banking sector can Lithuania and Latvia. Slovenia, Czech be categorized into three major groups. Republic and Estonia form the high- Romania, Bulgaria, Serbia, Bosnia and penetrated group. Herzegovina, Albania and Ukraine belong 5 Figure 4. Banking market penetration to GDP per capita, 2018 30 Higher penetration 25 SI CZ 43.1 270.8 Middle penetration ths) 20 R EE U SK E LV 26.6 ( LT 81.7 22.6 HU a t 28.6 123.5 i p a c 15 GDP / Lower penetration HR RO 64.7 99.8 10 PL 443.7 RS 31.7 BG 5 55.2 BH AL 15.8 UA 11.8 60.7 0 0 5 10 15 20 25 30 Total Assets / capita (EUR ths) Source: ECB CBD, EIU, Eurostat Note: Bubble size: total assets volume in 2018 (EUR bn)) In 2018, the capital adequacy ratio (CAR) Serbia (22%) and Latvia (22%) among the 17.1% and 17.5% respectively. Overall, the remained stable at a 20% level in the CEE 15 analysed countries. The three lowest capitalization of the CEE banking sector region. The highest CAR was reported CARs were recorded in Ukraine, Hungary is healthy and well above the regulatory in Estonia (30%) which was followed by and Bosnia and Herzegovina with 16.2%, minimum. 6 Figure 5. Capital adequacy ratio, 2016 - 2018 35% 30% 25% 20.1% 20% 20% 15% 10% 5% 0% PL CZ SK HU RO SI HR BG RS UA BH AL EE LV LT 2016 2017 2018 Average - 2017 Average - 2018 Source: National Banks Total assets of the analysed countries grew shrinking NPL ratios continued in the CEE shrinking but still robust corporate NPL by 10% on average, reaching EUR 1,200 region mostly due to higher cure rate on volume, which was one of the outcome of bn in 2018. The two largest, the Polish the back of solid macro conditions, as the severe macroeconomic crisis of 2014- and Czech banking sectors contributed well as active portfolio cleaning via loan 2015. Ukraine’s NPL ratio was followed from with EUR 633 bn. Strong macroeconomic portfolio sales. The average total NPL ratio distance by Croatia (12.1%) and Albania environment was steadily fuelling banking stood at 7.9% in 2018, 0.6 percentage (11.8%). In the CEE region, the lowest total asset growth in 2018. point lower than in 2017. Retail NPL ratio NPL ratio was posted in Estonia (0.5%), Czech decreased from 8.3% to 7.0% and the Republic (2.7%) and Slovenia (2.7%) in 2018.