Strengthening Central Europe Can Boost Banking M&A Deals

Several smaller cross-border banking mergers remain in the pipeline in central Europe as some western European lenders retreat from the region, although the immediate pressure to do deals has eased thanks to stronger local economies.

First-quarter economic growth in Poland and Hungary rose at or above 4%. Nowhere is that turnaround starker than in Hungary, whose banks are on track for a record year in mortgage lending due to a booming property market, Reuters reported.

The improved operating environment has helped lenders saddled with distressed legacy loans to clean up portfolios, releasing provisions and boosting profitability.

“Banks are now getting richer and chances of consolidation will be much smaller in these favorable economic conditions,” Hungarian central bank deputy governor, Marton Nagy, said at the Reuters Central & Eastern Europe Investment Summit.

But there are still some deals taking shape. Industry sources say OTP, Central Europe’s largest independent lender, and Belgian KBC could be among the main drivers of cross-border merger and acquisition activity.

Already a dominant player in Hungary and Bulgaria, OTP is now bidding for Romania’s Banca Romaneasca, a National Bank of Greece business, as part of a withdrawal of Greek lenders from the region.

Laszlo Wolf, OTP Bank’s deputy chief executive, told the summit that shake-out created opportunities for the bank to expand its southern footprint. “We will obviously look at good quality Greek banks,” he said. “The low interest rate environment has raised the issue of efficiency of scale.”

“It is not just Greek banks selling units in the region, but also owners who have realized that they cannot operate efficiently enough as a small bank. We will obviously look at those too.”

Wolf said one new development in the region was higher involvement in M&A deals by private equity funds. In one acquisition project, which he did not name, about half of the bidders were private equity investors.

“The western banking system is still dragging its feet. They have realized that wherever their scale is insufficient, they are only left with management time and responsibility, not profits,” an unnamed financial sector source said.

KBC, which owns K&H, Hungary’s third-largest lender by assets, signed a €610 million ($684 million) deal last year to acquire United Bulgarian Bank from the National Bank of Greece. KBC has said it was also looking at expansion opportunities in Slovakia.

ING Bank Slaski Chief Executive Brunon Bartkiewicz said Poland’s fifth-largest bank would be growing organically, but does not rule out buying another bank if it were to create an opportunity for “improving (Slaski’s) general ratios.”

Polish state-run fund PFR chief executive Pawel Borys told Reuters however that PFR was not going to buy any more banks after it acquired a 12.8% stake in Poland’s second-largest lender Pekao SA from UniCredit.