Financial institutions M&A: Sector trends - December 2017
What's inside
Opportunities and challenges for M&A in the European financial services sector
Progress 2017/Predictions 2018
Introduction
The road to recovery from the global financial crisis has been complex and challenging for financial institutions across Europe, with many still having some way yet to go
In 2017, the European financial services sector has weathered monumental political uncertainty as events in Spain challenge its constitution and financial ecosystem, Italy attempts to scale its €349 billion debt mountain and the UK's vote to leave the EU "becomes real". The uncertainty has been compounded by the shifting sands of financial regulation and the unprecedented eruption of new financial technology which promises to revolutionise, but also threatens to disrupt, the business models of even the most sophisticated and well-capitalised businesses.
Whilst the path ahead perhaps remains a daunting prospect for some, one thing is clear—successful implementation of inorganic business transformation strategies is a key solution for remaining competitive and winning market share.
With this in mind, in this report we analyse the key European M&A trends in 2017 spanning the main financial services subsectors, and offer insight into the 2018 outlook for M&A in each:
Banks
State-aided banks
Fintech
Asset management
Market infrastructure
UK consumer credit
European financial services
M&A trends
“Successful implementation of
inorganic business transformation
strategies is a key solution for
remaining competitive and winning
market share”
Banks, on the back foot following the financial crisis, are finally making a calculated comeback to M&A as they start to focus on core geographies and business lines. With balance sheets strengthened and capital reserves being rebuilt, global banks are now better placed to focus on markets and product offerings they believe will deliver the most growth in 2018.
While rating agencies are beginning to show first signs of positive sentiment towards European banks, the shifting regulatory landscape continues to complicate M&A processes, making it challenging to find committed buyers. Against this backdrop, high levels of financial sponsor interest in stressed and distressed assets are a welcome source of new capital. Recovery is certainly possible, but not without significant uncertainty.
Established financial institutions are engaging with fintech as never before and are now active participants in fintech M&A. Private equity and venture capital appetite for transactions remains strong. Fintech dealmaking is booming as a consequence, and there is every indication that this will continue for some time yet.
Megadeals in the asset management industry have been coming thick and fast: Standard Life's £3.8 billion tie-up with Aberdeen Asset Management, Amundi's €3.55 billion acquisition of Pioneer and Henderson and Janus Capital joining forces, to name but a few. Activity is likely to continue as MiFID II comes into force.
Technology and tougher regulation are reshaping the infrastructure the financial services industry relies on to function. The four pillars of financial market infrastructure: payment systems; trading platforms; financial benchmarks; and custodians are all unique in the trends that are influencing their M&A activity.
Dealmaking across the UK consumer credit landscape varies materially. While deal volume in the specialty finance and market place lending space continues to remain high, by contrast, M&A activity in the payday lending space is reserved for the few players who have weathered the Financial Conduct Authority’s interest rate caps and enforcement actions.
With balance sheet repair largely behind them, global banks are now cautiously re‑emerging in competitive auctions
Banks, on the back foot following the financial crisis, are finally making a calculated comeback to M&A as they start to focus on core geographies and business lines. With balance sheets strengthened and capital reserves being rebuilt, global banks are now better placed to focus on markets and product offerings they believe will deliver the most growth in 2018.
Our 2018 M&A forecast
Steady growth in M&A driven by ongoing non-core disposals, re-emergence of strategic M&A, continued interest from PE, and in-bound US and Chinese investment.
Disposal of non-core assets—one of the major drivers of deal activity in 2017—is likely to continue in 2018
A number of banks exited divisions they deemed non-core in 2017: Barclays has sold its French retail and wealth management businesses, disposed of a 22 per cent stake in its Africa Group and exited its UK trust business. Société Générale has offloaded a 49 per cent stake in Fortune and a 15.42 per cent stake in Eurazeo and spun-off TBC Bank. UBS, HSBC, BNP Paribas and Deutsche Bank are among the other banks to have made similar strategic disposals.
Investing for growth gains momentum
Institutions are beginning to invest for growth and pursue strategically important deals. Goldman Sachs, J.P. Morgan, UBS and Citi have announced expansion plans in Saudi Arabia while BNP Paribas has acquired stakes in Italian credit insurer Cargeas Assicurazioni and Swedish consumer credit group SevenDay Finans.
International buyer interest strengthens
Cross-border deals involving non-EU investors will continue in 2018. US investors—driven by stronger balance sheets—are likely to be active, taking advantage of the strengthening US$ and the loosening regulations.
2018 outlook
A steady growth in M&A activity driven by factors including ongoing non-core disposal programmes, re‑emergence of strategic M&A (i.e., larger banks seeking to expand within newly selected core territories), in-bound US and Chinese investment, and continuing PE appetite.
Current market
Upward
We are seeing
Continuing non-core and financial asset disposals
Sustained focus on restructurings, aimed at:
Streamlining within borders and movement towards leaner and simpler business models
Optimising regulatory capital and EU permission, governance, operational and tax efficiencies through centralisation
Leveraging existing third-party provider relationships across business lines and legal entities
Streamlining intra-group service arrangements (particularly in light of upcoming EU General Data
Protection Regulation compliance requirements and rising cybersecurity threats)
"Hard" Brexit contingency planning
Consolidation across Central and Eastern Europe, with support from political and regulatory authorities
Early signs of re-emergence of strategic M&A
JVs and other forms of collaboration focused on fintech development
Key drivers
Banks are still shoring up their balance sheets, given mega-fines and increasing capital buffer requirements
Stronger capitalised banks are ready to grow again, and regulators are being more supportive
Competition from 'challenger' banks and fintech offerings
US and Chinese buyers taking advantage of the strengthening US$
Trends to watch
M&A strategies are very carefully managed:
Banks are acutely aware of internal resource restraints and seek to optimise use of management time
Many banks have limited P&L capacity for losses and prefer to attempt to improve businesses before selling
Wealth of experience of divestment activity means auction and bilateral processes are better managed
Some banks are holding out for improved market conditions and maximising positive impact on valuation multiples of retained businesses
US in-bound investment, driven by repaired balance sheets (e.g., all US banks participating in the Federal Reserve's 2017 stress tests passed, loosening regulation (e.g., Volcker rule) and optimism for lighter post‑Brexit UK regulation)
Increasing focus by financial sponsors in FIG investment—including in banks
Differing prerogatives between supranational and local prudential regulators
Competition between local regulators across Europe attracts banks post-Brexit
Squeeze-out of smaller banks following MiFID II coming into effect in January 2018