Increased M&A predicted as banks navigate COVID crash

Analysis from consultancy firm Kearney has predicted a rise in mergers and acquisitions (M&A) over the next few years as banks seek to reduce costs in the short-term, re-focus the core business for the long-term, and transform operating models.

Now in its 11th year, Kearney’s European Retail Banking Radar tracks 92 retail banks in 22 European markets - comprised of 50 banks in Western Europe and 42 banks in Eastern Europe.

While the COVID-19 limitations and border closures have stopped cross-border activities in the short term, Kearney predicts an increase in domestic transactions. Looking at previous trends in the market, the research revealed that domestic mergers and acquisitions are often driven by the need for scale and cost reduction.

Post-crisis, banks will likely find M&A as the most efficient means to radically reshape their business portfolio - for both buyers and sellers - to achieve the required amount of cost reduction and transformation to stay afloat.

In fact, the analysis showed that 80 per cent of banks which had undertaken domestic M&A transactions after the 2008 financial crash outperformed other local banks who hadn’t within just three years.

The market is likely to also see change in operating models, across the board, with banks refocusing their core business offering. Some might seek to divest non-essential assets where they are not able to maintain competitive edge in the mid-term, whilst others might opt to source new capabilities - such as analytics and artificial intelligence - further scaling up their core business.

In addition to a rise in M&A, Kearney also forecasted a rise in strategic partnerships, particularly across smaller banks and FinTechs, as they look to gain reach quickly and efficiently.

Many startups have struggled during the lockdown, with several not qualifying for government subsidies. Collaborations with these smaller enterprises will also allow larger legacy banks to leverage capabilities off others, either through back-end operations, technology platforms, or shared supplier networks.

Simon Kent, partner and global head of financial services at Kearney, commented: “Retail banks will be feeling the effects of this current crisis for the next two or three years, so never has there been a better opportunity for banks to reshape their cost base and revise their long-term outlook.

"For a successful merger, banks will need to ensure strong due diligence and realistic expectations - setting out a good plan for integrating both entities - they’ll also need to take extra care in communication to all stakeholders, such as clients, employees and investors, ensuring cultures are aligned and employee motivation and retention remains strong."

He added: "While the Coronavirus crisis in Europe has subsided, it is far from over, but the resulting surge in M&A activity will present a multitude of opportunities for the years ahead creating a better and strong market in the long run.”

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