Bank dealmaking slumped to a five year low in 2022 – will it rebound this year?

Mergers and acquisitions involving Europe’s top lenders slumped to their lowest level in five years last year as aggressive moves by central banks spooked dealmakers.

Just 103 deals were closed involving banks in Europe in 2022, down from 123 the year prior and less than half of the 224 deals struck in 2019 before the pandemic, according to a report from S&P Global Market Intelligence. 

The slowdown came as monetary policymakers hiked rate across the continent to tame rampant inflation, scuppering the supply of cheap cash that fuelled a dealmaking frenzy in the years up to the pandemic.

The European Central Bank’s interest rate currently sits at 2.5 per cent, while the Bank of England has pushed rates to a 14-year-high at 3.5 per cent.

The aggressive moves caused a sharp slowdown in the second half of last year as dealmakers closed on 45 transactions, down from 45 in the same period in 2021.

A $4.91bn deal by Russian lender VTB to snap up Russian peer Bank Otkritie – both of which are state-owned and have been slapped with sanctions by much of the Western world – was the largest deal by value in the European banking sector in 2022, S&P found. 

Three deals in the Nordic region were also among the biggest deals in the sector, S&P found, with Jyske Bank’s purchase of the Danish arm of Sweden-based Svenska Handelsbanken for around $4.59bn, coming in as the second most valuable deal in the sector.

Does a rebound loom this year?

However, bankers have predicted something of a resurgence this year as stored up “dry powder” raised prior to the downturn is put to use.  

Analysts at London-listed investment bank Peel Hunt said earlier this month the number of smaller deals would increase after the first quarter of 2023 as firms finance their own deals without the need to borrow,

“The sheer weight of dry powder, following a period of record fund raising, demands the deployment of capital,” Michael Nicholson, head of M&A at Peel Hunt, said.

“For smaller transactions, where the offerer is prepared to finance the cash consideration entirely through existing resources or where an existing portfolio company has available facilities to finance the acquisition independently, there may be scope to transact before the debt markets re-open more broadly” Nicholson added.

PwC’s head of deals, Lucy Stapleton, took a similarly optimistic view in arguing a combination of stabilising interest rates and “increased certainty” could kickstart a spate of big ticket M&A activity as private equity funds seek to deploy their stores of “dry powder”.

Tim Allen, a partner at PwC, also noted there “is still an appetite in the market for deals in financial services, energy transition and where technology is involved, as companies are keen to increase their digital capabilities.”