How Can Banks in the EU Achieve Consolidation That Would Lead to Higher Profitability

Abstract

One of the major issues the EU banking sector is currently facing is weak bank profitability. The several banks competing with one another in the market can be used to explain this. In order to remain competitive, banks are undergoing mergers and acquisitions in order to boost profitability. The majority of M&A activity took place on the domestic market, where larger, more recognizable companies acquired smaller targets. The profitability of the banks involved in the process has benefited from consolidation. It has been discovered, specifically, that the targets' higher capitalization, liquidity, and cost efficiency can be connected to post-transaction profitability. As a result, after the M&A transaction process, cost-cutting reduced the overall number of EU banks and banking industry personnel, which is also mentioned in this study. The goal is to analyze the trend while examining return on equity (ROE), a measure of bank profitability. The paper aims to describe the impact of M&As on banking profitability, the number of banks and the number of employees within the banking sector using an time-analysis on official data on the number of banks and ROE within the EU during a specified time period provided by the European Central Bank (ECB). The most important finding is that M&As have a beneficial effect on banking profitability, which leads to a reduction in the number of banks in the market. The EU's banking industry has become more concentrated, which has significantly reduced competition.