Financial institutions re-emerged as the hot sector in European M&A last week after Banco Esprito Santo e Comercial de Lisboa (BES) acquired its Portuguese banking peer BPI SGPS for E17.2bn ($17.2bn).

The deal, which came at the same time as Citigroup furthered its European investment banking expansion with the acquisition of Schroders corporate finance and capital markets business for £1.35bn (E2.16bn), illustrates the extent to which banking consolidation remains a consistently strong theme in European M&A. BES-BPI's merger, which is expected to be followed by a competing offer for Banco Pinto & Sotto Mayor, the other Portuguese bank which is the subject of a bid by rival Banco Portuges, are seen to be the final pieces of the Portuguese banking puzzle. "There is a trend towards consolidation in the European banking industry as country leaders seek to create strong, defensible positions in that market,' says Andrea Orcel, a senior financial institutions banker at Merrill Lynch. Merrill Lynch, which has played a key role in banking M&A on the Iberian peninsula, having advised both Banco Bilbao and Argentaria on their E18.3bn merger, is advising BES on the merger. Goldman Sachs advised BPI. "In Spain the banking industry began to consolidate at an earlier stage and the process of consolidation is in its final stage,' comments Orcel. "Italy, which was known as the petrified forest of banking was the latest to consolidate and is undergoing the fastest consolidation. It is almost there.'Regarding the rest of Europe in terms of consolidation, Orcel views the UK and Sweden as being "underway' while Germany is definitely "not there'. This domestic or, in the case of Scandinavia, intra-regional consolidation, is widely expected to be followed by pan-European mergers and alliances. Already Banco Santander Central Hispano (BSCH), which was one of the first continental European banks to consolidate, has emerged at the heart of a pan-European bancassurance alliance encompassing the Royal Bank of Scotland, Société Générale, San Paolo-IMI and Commerzbank. "The first signs of cross-border alliances come when a bank has a strong base at home,' says Orcel. "To expand the business the company will resort to cross-border mergers.' BBVA, meanwhile, is trying to put a problematic deal together with UniCredito Italiano, with the aim of launching Europe's first full European cross-border merger by the end of 2002. UniCredito's main shareholders have already bought almost 2% of BBVA in preparation for a bigger cross-shareholding deal.