Danish bank mergers and acquisitions wave to continue after ‘revealing’ deal in 2020
Four merger announcements towards the end of 2020 marked the start of a wave of consolidation in the Danish banking sector which analysts say will continue into 2021. Future transactions, however, may not offer the same opportunities for value creation due to recent increases in stock prices.
Banking transactions resumed across Europe in 2020, and Denmark was no exception. Sparekassen VendsysselThe agreement reached by Salling Bank A / S at the end of September was followed by three other transactions in as many months. Among them, Sydbank A / S bought Alm. The banking arm of Brand A / S, Vestjysk Bank A / S acquiring Den Jyske Sparekasse A / S and Spar Nord Bank A / S taking over the Danish activities of P / F BankNordik.
Further mergers and acquisitions activity followed this year, with Arbejdernes Landsbank A / S announcing on March 24 that it would take a majority stake in Vestjysk Bank. While the two banks will continue to operate independently, Mads Thinggaard, equity analyst at ABG Sundal Collier, considers it likely that Arbejdernes Landsbank will complete a full merger at a later stage.
The surge in transactions comes after years of declining profitability in the Danish banking sector, with an average return on equity falling to 4.99% in 2020, from 11.17% in 2017, according to data from S&P Global Market Intelligence. The average cost-to-income ratio increased to 61.48% from 50.00% during the same period.
Rising capital requirements, tighter regulation and rising IT costs make it too expensive for small and medium-sized Danish banks to operate in particular, said Mikkel Emil Jensen, equity analyst at Sydbank, in an interview. Add these factors to a fairly fragmented Danish banking market that has long faced pressure on margins in light of years of negative interest rates, and you have a market ripe for consolidation.
“The motivation to consolidate is certainly not less in 2021”, Said Jensen.
The transactions towards the end of 2020 were “a revelation that it is possible to create tremendous shareholder value by going through these mergers,” Thinggaard told S&P Global Market Intelligence.
The acquisition of Den Jyske Sparekasse by Vestjysk Bank, for example, led to an overbid of 40% for the shareholders of the acquired part, Thinggaard mentionned. He expects buyer’s EPS to increase by 30% from the transaction – a “huge reward” for shareholders of both banks. Meanwhile, Thinggaard estimates that Sydbank’s EPS will rise 15% to 20% after its “relatively small deal” to acquire Alm. Brand bank.
A common feature of transactions in late 2020 was that they were driven by desire rather than financial distress, said Nicholas Rohde, owner of BankResearch, a provider of financial institutions data and analysis in Denmark. Although Danish banks have taken large provisions for coronavirus-related loan losses, they have done quite well in 2020 and have so far suffered very few actual loan losses, he said in a statement. interview.
On the contrary, banks have sought to increase their profitability and take advantage of cost synergies, said Rohde, who expects the same factors to lead to more mergers in 2021. He plans to merge two banks in particular. . – which includes lenders such as Ringkjøbing Landbobank A / S, Sparekassen Sjælland-Fyn A / S and Jutlander Bank A / S – will consider potential targets primarily among the smaller banks in group three.
Danish banks are ranked by the country’s financial regulator, with institutions in groups one to four ranked according to the size of their working capital. The regulator’s recently released list of groups, based on reports from the third quarter of 2020, had a total of 90 Danish banks or branches of foreign banks.
Jensen agreed that most future deals are likely to be between small and medium-sized banks, adding that such mergers typically face fewer hurdles in gaining approval from competition authorities. But recent activity suggests there is also an appetite among the big players if an opportunity presents itself, he said.
While the drivers behind recent deals are not directly linked to the COVID-19 pandemic, regulators’ restrictions on dividends throughout the crisis have left many banks in Denmark with a large capital surplus. that they are now seeking to put to work elsewhere, Thinggaard said.
The Danish financial regulator has asked banks to suspend dividend payments for 2019 and called for a limit on payments for 2020. Despite these restrictions, Alm. Brand’s sale of its banking business to Sydbank shows that institutions are allowed to distribute the paid-up capital of a sale, Thinggaard said.
A growing focus on mergers and acquisitions has boosted stock valuations at Danish banks, Thinggaard said. This, combined with a positive global sentiment towards bank stocks and the improved business model of Danish financial institutions, has resulted in significant gains in share prices in the Danish banking sector in recent months, he added.
In the six months following the announcement of the Sparekassen Vendsyssel-Salling Bank deal, the S&P Denmark BMI Banks Industry index rose 44%, according to data from the S&P Dow Jones indices.
As a result, future deals are unlikely to generate as much value creation as those announced in 2020, Thinggaard said, although he still foresees deal opportunities that “will make sense and deliver shareholder value. “and believes that the Danish banking sector is likely. to see more mergers this year.
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