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.
Fintechs are offering consumers a richer and smoother experience and are removing friction and cost from market infrastructure. Believe the hype! But proceed with caution...
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.
Our 2018 M&A forecast
Fintech is the 'darling' of financial sector M&A and will enjoy the spotlight for some time to come as market participants embrace enablers in their quest for competitive advantage.
Technology is fundamentally changing the way we deal with money and capital
Fintech has moved from "disruptor" to "enabler" for many financial institutions and continues to shape the future of the financial sector. Here's how:
Strategics' hunger for more fintech M&A
Strategic buyers have seen tangible examples of fintech success, such as Calastone's purchase and sale of mutual funds using blockchain and Natixis making its first blockchain-powered fund distribution. Case studies like these mean other traditional institutions cannot afford to sit on the sidelines and wait to see how fintech develops. They have had to act and this has prompted a flurry of joint ventures and acquisitions, such as RBS's partnership with blockchain-based mortgage reporting developer R3 CEV, Santander's acquisition of transaction processor Elavon and BNP Paribas's investment in robo-adviser Gambit Financial. Established banks, insurers and asset managers recognise that fintech can accelerate the re-architecture of back-end infrastructure with new efficient and cost-effective models.
PE and venture capital: Fintech high on the deal radar
Private equity and venture capital investors have continued to invest heavily in the fintech sector, attracted by growth prospects and the willingness of financial services companies to do deals, which increases exit options for sponsors. Payment processors Klarna and iZettle have both received financial sponsor backing this year, while Monzo, OakNorth Bank, Nubank, Neyber, Revolut, Tide, Yoyo, Zopa and Neos all reported successful funding rounds in H2 2017.
Fintech's transformation of financial services sector grows apace
EU finance ministers have emphasised the need to introduce fintech regulations to protect consumers, and the ECB has begun drawing up new licensing regulation for fintech businesses. While increasing regulatory scrutiny remains a concern, on the whole, local governments are supportive of the industry and are competing to attract fintech businesses to their shores. Fintech transformation of the financial services sector continues apace.
2018 outlook
Fintech remains an M&A focus for financial sponsors and an investment omphalos for many established financial institutions. Global banks and insurers are increasingly looking to 'market infrastructure' fintech as a cure for internal cost management.
By contrast, 'customer-facing' fintech is having an increasingly disruptive impact on traditional retail banking models. Such solutions offer the intuitive end-user experiences which High Street lenders struggle to provide. But penetration of such solutions has not been consistent across all financial subsectors—for instance, penetration within the asset management industry has been more gradual.
Current market
Upward, significant
We are seeing
Expansion of fintech business, through successful fundraisings as well as inorganic growth strategies
High, and growing, financial sponsor appetite for fintech
Steady upward trajectory of strategic M&A. Established financial institutions are engaging with fintech in a variety of ways:
JVs with existing fintech businesses
JVs with competitors to develop fintech
Acquiring the whole/strategic stakes in fintech businesses
Funding fintech start-ups in exchange for 'early bird' stakes
Establishing accelerator programmes to foster ground-up development
Early signs of profit generation for established financial institutions from M&A
Key drivers
Fintech is being embraced as an 'enabler' of financial service provision—perception that fintech could be the solution to:
Realising cost efficiencies across existing service provision models
Maximising existing customer bases, through enhanced data analytics and processing
Attracting new consumers, especially millennials, who respond well to just-in-time personalised services
Accessing new markets, including unbanked and under-banked communities in China, Africa, India and SE Asia
Rapidly growing cybersecurity threats
Top-down support for fintech businesses, including from national governments across Europe and local EU regulators. However, growing scepticism from supranational regulators could impact M&A levels
Progressive regulatory and supervisory approach. Both UK prudential regulators are acutely aware of their national imperatives of ensuring the UK financial services market remains 'open for business' as Brexit looms—but they face stiff competition from other regulators across the bloc
Regulatory intervention (e.g., the European Commission, through PSD2, and the UK Capital Markets Authority, through its February 2017 final banking order, are encouraging 'open banking')
Trends to watch
Fintech continuing to disrupt traditional retail banking models—how will the High Street banks react?
Tangible fintech successes boosting M&A activity. We are seeing the first signs of blockchain technology deployment across fund distribution, cross-border FX transfers and securities settlement
Profit generation for established financial institutions from M&A activity
Financial sponsors seeking to realise investments through IPOs, disposals and other exit strategies
Will the UK be toppled as the epicentre of fintech development post-Brexit?
Regulatory intervention in certain fintech subsectors (e.g., P2P, coin offerings and bitcoin CFD trading)