How can Banks in the European Union Achieve Consolidation that would lead to Higher Profitability

Proceedings of The 4th International Conference on Advanced Research in Management, Economics and Accounting

Year: 2023

DOI: https://www.doi.org/10.33422/4th.armeaconf.2023.05.100

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How can Banks in the European Union Achieve Consolidation that would lead to Higher Profitability

Azra Muratovic

ABSTRACT: 

One of the main issues the European Union (EU) banking sector is dealing with is weak bank profitability. The numerous banks competing for customers is one of the primary causes. Banks are engaging in mergers and acquisitions in order to boost profitability and remain competitive. The majority of mergers and acquisitions (M&As) activity has been domestic in nature, with smaller targets, and larger, more financially stable acquirers functioning as consolidators. Lower cost efficiency, greater liquidity, and higher capitalization of targets can all contribute to improved post-merger profitability. The aim of this paper is to analyze the influence M&As have on EU banks, using a time analysis method over the past fourteen years examining the return on equity (ROE), the number of banks and the number of employees within the EU banking sector. The motivation of this paper is to describe how mergers and acquisitions have influenced the number of banks in the EU consequently increasing the performance of the banks which stayed in business. M&As also markedly raised competition in the banking industry. Bank mergers and acquisitions are often regarded as an mean for reducing overcapacity in the market and weak profitability in banking sector The main finding is that M&As have a beneficial effect on banking profitability, which reduces the supply of banks in the market. Less competition has primarily led to a consolidated banking sector in the EU. The results show that M&A transactions were followed by a statistically significant increase in the ROE of the consolidated banks after two years.

keywords: banking consolidation, banking profitability, M&A, number of banks, banking competition