European Banking Consolidation Wave: Record Profits Drive M&A Momentum in 2025

The European banking sector is poised for significant consolidation in 2025, as record profits and improving market conditions fuel renewed merger and acquisition activity across the continent. Major financial institutions are capitalizing on their strong profitability to expand and transform their businesses, with several potential megamergers already in the pipeline.

Three landmark deals are currently shaping the landscape: Banco Bilbao Vizcaya Argentaria SA’s bid for Spanish rival Banco de Sabadell SA, and Italian banking giant UniCredit SpA’s ambitious moves to invest in Germany’s Commerzbank AG while simultaneously pursuing a takeover of domestic peer Banco BPM SpA. These transactions signal a willingness among European banks to pursue deals of a magnitude not witnessed since the global financial crisis.

The surge in M&A activity comes as banks seek to address multiple structural challenges. Scale has become increasingly crucial as regulatory costs and IT investments continue to rise, while growing competition from low-cost providers puts pressure on margins. The complexity of customers’ needs, particularly in corporate and institutional banking, is driving institutions to expand their capabilities through strategic acquisitions.

Banks are now better positioned to pursue acquisitions thanks to sustained periods of strong profits and declining financing costs. The sector boasted the highest average transaction value across all industries in the third quarter of 2024, with deal values increasing despite slightly lower transaction volumes.

The regulatory environment is showing signs of becoming more accommodating. The European Central Bank has confirmed that banks with credible integration plans will not face higher capital requirements, and recent guidance allows “badwill” to be counted as regulatory capital. This more permissive approach contrasts with previous years of stringent oversight.

However, challenges remain. Some proposed mergers have faced resistance from national authorities. UniCredit’s approach to Commerzbank has encountered pushback from German politicians and unions concerned about foreign ownership of a national champion. Similarly, Spanish authorities have extended their review of the BBVA-Sabadell merger due to competition concerns.

The landscape for potential deals has expanded as several large banking groups previously bailed out during the global financial crisis return to private ownership. Governments have reduced their stakes in institutions such as NatWest Group, Commerzbank, ABN AMRO Bank, and others throughout 2024. This transition is expected to give banks more flexibility in pursuing strategic opportunities.

Looking ahead to 2025, sentiment in the global M&A market remains optimistic, driven by anticipated reductions in interest rates across the U.S. and Europe, the resolution of key national elections, and strong equity markets. The technology sector, particularly involving artificial intelligence capabilities, is expected to play a crucial role in driving deal activity.

European banks are also diversifying their income streams through strategic acquisitions in asset management and fee-generating businesses. This trend has been facilitated by the Danish Compromise, an EU rule allowing banks to use their insurance units for acquisitions under favorable capital terms, which becomes permanent in January 2025.

As the industry evolves, size increasingly matters for European banks seeking to compete on a global scale. UniCredit CEO Andrea Orcel emphasized this point, stating that “Europe needs stronger, bigger banks to help it develop its economy and help it compete against the other major economic blocs”.