12 Mar, 2024
Romania emerges as hotspot for European bank M&A
By Beata Fojcik
The recent slew of mergers and acquisitions in the Romanian banking sector looks set to continue as multiple factors drive consolidation in the market.
Italy-based UniCredit SpA bought Alpha Services and Holdings SA's Romanian unit in late 2023, creating the country's third-largest bank by assets. Fellow Italian lender Intesa Sanpaolo SpA will double its assets in Romania following the recently announced acquisition of First Bank SA, while Banca Transilvania SA in February agreed to purchase the local unit of OTP Bank Nyrt. in a move that will strengthen its position as the country's biggest bank by assets.
Regulatory pressures, digitalization and a push to optimize costs and profit margins have driven tie-ups among Romania's banks in recent years, said Dinu Bumbăcea, country managing partner at PwC Romania. Additionally, the market is relatively small in nominal terms and offers room for further consolidation, said Gunter Deuber, managing director, chief economist and head of Raiffeisen Research.
Romania is "a very juicy market for M&A," Deuber said during a recent webinar.
Building scale
The need to achieve scale has driven much of the recent dealmaking activity. OTP Bank CFO László Bencsik said in November that its Romanian business was too small to effectively compete and unable to acquire another sizable asset in the country.
"It's not that we don't see potential in the Romanian market, the problem is that everyone sees a huge potential in the Romanian market," said Bencsik.
BNP Paribas SA unit BNP Paribas Personal Finance SA also decided to close its Romanian consumer finance branch in 2023 as it failed to reach the size necessary to absorb major IT investments needed for a competitive positioning.
"Our view on Romania has not changed ... We still consider it a very fast-growing economy; it is still an attractive banking market," Alpha Bank CEO Vassilios Psaltis said following the deal with UniCredit, after which Alpha will retain a 9.9% stake in the combined entity.
The consolidation is likely to continue, according to Bumbăcea. From 42 banks in 2008-2009, the Romanian banking system has shrunk to 32 banks in September 2023. With the recently announced acquisitions, this will drop to 29.
"If we look at the numbers, Romania still has too many banks for the size of the banking market and the size of the economy, and the system is still considered fragmented," Bumbăcea said.
The recent introduction of a bank tax in Romania could also stimulate further deals as it will prompt local banks to analyze and reshape their strategies. "Regarding the M&A prospects, we expect a further consolidation of the banking system specifically because this new tax is eroding profitability," Bumbăcea said.
Romania's bank tax is likely to reduce the profitability of small- and medium-sized banks in particular, thereby encouraging consolidation, Natasha McSwiggan, economist on the Banking Risk team at S&P Global Market Intelligence, said in a recent note.
– Access Romania's economic and demographic data on S&P Capital IQ Pro.
– View Romania's banking sector aggregate data on S&P Capital IQ Pro.
Macro tailwinds
Romania's economic potential is among the factors driving interest and activity in the banking sector.
"I think Romania is the most successful catching-up economy in the region over the last 10 years," Deuber said. "If you think Romania can continue this route then it is the banking market to be maybe for the next decade in the region."
Romania's GDP was growing at a faster pace than that of other countries in the region before it plummeted during the COVID-19 pandemic. While it still has not reached pre-pandemic levels, it is estimated to outperform regional peers such as Bulgaria and Poland in 2024. Domestic credit expansion has fallen from its 2021 levels but is forecast to pick up this year, Market Intelligence data shows.
The profitability of Romania's biggest banks has been growing, and their 2023 earnings reached or are on track to reach the highest level in the last four years, bolstered by high interest rates. They have also improved loan quality and cost efficiency, while the common equity Tier 1 ratio for the sector remains above the EU average, Romanian central bank data shows.
Regional promise
There were 16 banking sector-related acquisitions announced in 2023 in central and Southeast Europe, Market Intelligence data shows. While that represents a decline from the 28 deals announced in 2022, the region remains attractive for foreign banking groups with a presence in the area, according to the European Investment Bank (EIB).
When asked about their long-term strategies, 50% of cross-border banking groups participating in the EIB's semiannual survey published in December said they wanted to "selectively expand" in the region, compared with 45% and 30% in the two preceding surveys.
In addition, 40% of cross-border banking groups wanted to maintain the same level of operations in the region. As well as Romania, the respondents were optimistic about the Czech market, while they were more pessimistic about Bosnia and Herzegovina.
With M&A activity across the continent still lacking, UniCredit for one has singled out central and Eastern Europe as a focus area for bolt-on deals.
"We see more opportunities to add value in [central and Eastern Europe] than we would see in other markets," CEO Andrea Orcel said following the Alpha deal.
As of March 11, US$1 was equivalent to 4.55 Romanian lei.