Poland’s second-largest lender by assets, the state-controlled Bank Pekao, will not merge with smaller competitor Alior Bank, the pair announced on August 7.

Both banks are units of state-controlled insurance giant PZU, which took controlling stakes in the two lenders in effect of the government-encouraged drive to create a strong state financial group in a sector dominated by foreign capital. Speculation about a possible merger began as soon as PZU became the main stakeholder in Alior and later in Pekao.

However, Pekao and Alior said in a statement, “the banks did not reach an agreement with regard to the terms of their merger” that would generate the highest added value for shareholders of both banks.

The decision to end merger talks stops – at least for the time being – the process of consolidation in the Polish banking sector. 

Smaller Polish banks are facing problems in achieving satisfactory profitability in an environment of record-low interest rates and are looking to exit market while the bulked-up state-controlled banks are in the first line of potential buyers.

The stock market took in the decision to call off the merger positively. Pekao shares gained 7.1% to nearly PLN118 per share at the end of the day’s trading on the Warsaw Stock Exchange on July 8. Alior’s stock grew just over 4% to PLN76.2 per share.

Meanwhile, Bank Pekao said on July 8 its attributable net profit came in at PLN 539.8mn (€126.7mn), a growth of 0.9% y/y. 

The bank saw income from net interest grow 8.7% y/y to just over PLN1.2bn, while net fees and commissions grew 6% y/y to PLN617.3mn. Income from banking operations increased 9.8% y/y to over PLN1.9bn.