Mergers between mid-sized European banks appear more likely than deals involving the region’s biggest players, says Fitch Ratings in a report release on Wednesday.
Deal activity among mid-tier banks in Europe is more likely than transactions between big banks such as Deutsche Bank and Commerzbank, the report notes.
“This is because many of the larger banks, traditional acquirers of other banks, are capital constrained, making it more difficult to fund sizeable deals,” the Fitch report says. “Convincing board members and shareholders that consolidation is a sound choice at a time when returns generated by many EU banks are poor is likely to be tough.”
Data from the European Banking Authority shows that EU banks earned an average return on equity of 4.7% in 2015, “well below the 10% cost of capital that EU banks typically quote as a benchmark figure,” the Fitch report says.
Yet, the report also says that banks in countries with more concentrated banking systems, such as Sweden, the Czech Republic and Slovakia, report relatively strong returns, “suggesting that consolidation in countries with more fragmented banking systems would strengthen the banks.”
Although there are more than 3,300 banks operating in the EU, over half of these are savings and cooperative banks, according to the Fitch report.
“Smaller banks not linked to such groups may struggle to continue to operate independently in a challenging environment of low interest rates, mounting regulatory pressures and still sluggish economic growth,” the report says.