Financial institutions M&A: Sector trends - June 2018
What's inside
June 2018
We highlight the key European M&A trends in the first half of 2018, and provide our insights into the outlook for M&A moving forward
Introduction
In 2017, the European economy expanded by 2.5 per cent, its strongest performance since before the global financial crisis. However, economic growth has done little to ease mounting stakeholder pressure on the bloc’s financial institutions. Persistently low interest rates, increasing regulatory burden, competition from fintechs, unavoidable IT cost hikes and elevated consumer expectations are only some of the factors which have led to declining revenues for many of the region’s largest and most well-established financial services businesses.
The call of the global financial elite in Davos for consolidation across Europe’s financial services industry was somewhat inevitable.
Banks have emerged from the global financial crisis with a clearer picture of how they need to be structured. Strategic M&A is back as banks across Europe consolidate and lean in to the fintech revolution.
State-aided banks are a fertile source of deal flow. Institutions continue to deleverage balance sheets and dispose of non-core businesses, while governments seek privatisation. But make no mistake — deals are hard fought, with risk allocation needing to be carefully managed at every turn.
Fintech M&A volumes and values soared in H1 2018 as banks embraced fintech as a key enabler of operational efficiency and customer satisfaction. Private equity and venture capital houses continued to invest aggressively in the space, buoyed by a series of strong exits and growing buyer demand.
New regulation, competition from fintech disruptors and ever-more sophisticated and demanding retail investors (wanting more for less) have forced asset/wealth managers to build scale through mergers of equals, acquisition of smaller players and buy-in of technology. The global financial crisis is behind them, but the new challenges are no less daunting.
M&A in payment services is red hot, but anti-trust concerns in the trading platform space and dominant incumbents in the custodian sub-sector has meant deal activity as a whole has been uneven.
Regulation has put the brakes on deal activity involving credit card providers and payday lenders, but specialty and marketplace lenders are continuing to attract large amounts of strategic and private equity interest.
Consolidation activity intensifies with possible mega-mergers on the horizon
White & Case partner Gavin Weir shares his predictions for the asset/wealth management sector over the next 12-18 months and discusses what has been driving consolidation within the sector.
A decade on from the credit crunch, state-aided banks are still vulnerable. Systemic stability is top priority. The gravity of balance sheet management will continue to weigh heavily for the foreseeable future.
State-aided banks are a fertile source of deal flow. Institutions continue to deleverage balance sheets and dispose of non-core businesses, while governments seek privatisation. But make no mistake — deals are hard fought, with risk allocation needing to be carefully managed at every turn.
Outlook
Key reasons for high-activity levels:
The state heads for the door: Governments are ready to offload stakes to recoup public funds
Accounting MOT drives disposals: IFRS 9 has lifted the bonnet on balance sheets
Financial sponsor appetite: Attractive returns, and banks need new money
Our M&A forecast
High levels of M&A activity are anticipated, particularly across Greece, Italy, Spain, Portugal and Ireland, as banks continue NPL and non-core disposal strategies. Stability funds are ready to offload assets rescued during the global financial crisis and stressed banks are consolidating to stabilise operations.
Current market
Upward, significant
We are seeing
Balance sheet management remaining the top priority:
Ongoing NPL management and disposals
Rationalisation of business portfolios through continuing non-core disposal programmes
Retail bank consolidation, especially across Western and Central Europe:
Cutting costs through operational efficiencies
Exploiting economies of scale and scope
Spreading fixed costs across larger expense bases
Widening customer catchment and deepening existing business relationships by mirroring customer footprints
Key drivers
Governments are keen to offload state-owned stakes in banks bailed out during and in the aftermath of the global financial crisis
Increased accounting pressure from IFRS 9 to deleverage NPLs and other non-core financial assets
State-owned/backed banks continue to face profit-depletion through public and private litigation relating to legacy conduct issues
High levels of US and Western European financial sponsor engagement in stressed and distressed M&A — sponsors are able to secure high returns in a low interest rate environment
Challenges
Non-core sale strategies are under pressure:
Prudential regulators maintain high thresholds to be convinced of a potential buyer's ability to ensure stability for the relevant asset and for the wider domestic banking system
Inconsistency between antitrust imperatives (i.e. market competition) and prudential regulatory imperatives (i.e. financial market stability)
Financial sponsors driving a hard bargain to extract buyer-friendly deal protections
Certain assets are simply too large or systemically important to attract multiple suitors
Rising litigation risk — 'private' litigation from market participants' reaction to government action, as well as 'public' litigation from inconsistency of application of new Member State regulatory reforms
Regulatory landscape continues to change and evolve, both at Member State-level (e.g., Greece's proposed 'state-wide bad bank') and EU level (e.g., European Commission's March 2018 proposals for tackling high NPL ratios)
Trends to watch
Structural weaknesses in bank operating models (e.g., high NPL levels, cost inefficiency and over-banking), particularly across Greece, Italy, Spain and Portugal, continuing to drive disposal programmes
Continued development of NPL securitisations
Damage to buyer sentiment by inconsistent application of national and supranational legislation across the EU
Publicly reported deals & situations
NPL management & disposals
€25bn worth of live NPL deals are expected to close in H1 2018.*
NPLs of Italian banks are forecasted to fall to €42.5bn by end-2019.**
Ongoing:
Permanent TSB: Disposal process for "Glas" portfolio (June 2018)
Piraeus Bank: New 3-year balance sheet restructuring project (May 2018)
Ulster Bank: Disposal process for €1.6bn of Irish mortgages (May 2018)
Alpha Bank: Disposal process for "Venus" portfolio (February 2018)
NBG: Disposal process for "Earth" portfolio (January 2018)
Completed:
Lloyds: Disposal of £4.3bn of Irish residential mortgages (May 2018)
Piraeus Bank: Disposal of €1.45bn corporate NPE portfolio (May 2018)
AIB: Disposal of €1.1bn of NPLs (April 2018)
UniCredit: Disposal of exposure to €16.2bn "Fino" NPL portfolio (February 2018)
Piraeus Bank: Disposal of €200m of Romanian-originated NPLs (January 2018)
Alpha Bank: Disposal of €380m of Romanian wholesale NPLs (January 2018)
Hellenic Bank: Disposal of €145m of NPLs (January 2018)
Monte dei Paschi: Disposal of €25bn of NPLs (January 2018)
Regulatory "shifting sands"
European Commission: Proposed new measures to address EU NPLs (March 2018)
Bank of Greece: Proposed creation of a "state-wide bad bank" to oversee NPL management across all Greek banks (March 2018)
European Parliament: Adoption of a non-binding resolution for a review of EU bank state-aid rules (March 2018)
Exit strategies — many under pressure, but some silver linings
Deal highlight
The €1 billion sale of HSH Nordbank to a consortium of private equity buyers, led by Cerberus and J.C. Flowers, was undeniably monumental.***
The IPO of Arion Bank is the largest ever on Nasdaq Iceland (by market value), resulting in Arion Bank becoming the second-largest company listed on the Icelandic Stock Exchange (by market capitalization). Arion Bank houses the domestic operations of failed international banking group Kaupthing.***
Under pressure:
UK government's RBS sell-down: UK Government Investments sold down 7.7% of RBS amidst heavy Labour criticism over considerable losses to UK taxpayers (June 2018)
NBG's Ethniki General Insurance: EXIN Financial Services' failure to obtain consent from the Bank of Greece and competition approvals for its proposed acquisition (March 2018)
NBG's Banca Romaneasca: National Bank of Romania's rejection of OTP Bank's proposed acquisition of a 99.28% stake (March 2018)
Bankia: Spanish government's proposed sale of its 60% stake by end-2019 has resulted in a permanent overhang on Bankia's share price, compounding troubles of retaining staff (given salary and bonus caps) and customers (amidst market uncertainties) (March 2018)
Commerzbank: Potential merger counterparts for Commerzbank have been rumoured to include Deutsche Bank, UBS, Crédit Agricole, UniCredit and BNP Paribas. However, no deal has materialised yet (September 2017 – March 2018)
HSH Nordbank: Hamburg and Schleswig-Holstein's disposal took place on the last day of the European Commission's deadline for privatisation (February 2018)
Rosevrobank: EBRD's accelerated disposal of its 11% stake after its loss of 11.75% of Promsvyazbank, following Central Bank of Russia's 2017 bail-out (January 2018)
Silver linings:
Arion Bank IPO: Dual-listing on Nasdaq Iceland and Nasdaq Stockholm (June 2018)
Perception of inconsistent EU government/regulator approach
Perception of government interventionism:
UK government: Vote against proposal to give RBS investors more control over executive compensation (May 2018)
Italian government: Provided a guarantee for Monte dei Paschi's issue of €750m of 10-year Tier 2 bonds (January 2018)
Perception of regulator interventionism:
Bank of England: Proposals to require UK banks to publicly reveal resolution regimes (June 2018)
ECB: Controlled collapse of ABLV Bank (February 2018)
European Commission: In-depth investigation into Banka Slovenije's proposed pre-sale restructuring of Nova Ljubljanska Banka (January 2018)
Comisión Nacional del Mercado de Valores: Bankia – Banco Mare Nostrum merger (January 2018)
Perception of leniency:
UK FCA: Refusal to publish report on the RBS's controversial treatment of troubled SMEs (February 2018)
EBA: Issue of voluntary standard data templates for use in EU NPL transactions (February 2018)
European Commission: Rejection of European Parliament's request to investigate the sale of financial products by Banco Espírito Santo (January 2018)
PE seeking to extract buyer-friendly deal terms
Lone Star: Secured back-stop guarantees from Fundo de Resolução in connection with its acquisition of 75% of Novo Banco in October 2017. Novo Banco's FY2017 €1.4bn net loss resulted in Fundo de Resolução paying €791.7m under the guarantees (March 2018)
Cerberus and J. C. Flowers: Consortium acquisition of HSH Nordbank, which required €6bn of HSH Nordbank's NPLs to be carved out into a separate vehicle (February 2018)
Pollen Street Capital and BC Partners: Backed Shawbrook's acquisition of RBS's portfolio of Channel Island business loans for £50m less than the auction price (January 2018)
Heightened risk of 'public' and 'private' litigation
Private:
RBS: UK Court of Appeal's dismissal of Property Alliance Group landmark £30m swaps mis-selling case against RBS (March 2018)
Novo Banco: Pimco's damages claim seeking compensation from alleged insider trading of Novo Banco bonds (February 2018)
Public:
RBS: US$4.9bn settlement with the US DoJ concerning US loan mis-selling allegations (May 2018)
Deutsche Bank Securities: US$4.5m settlement with the US SEC concerning alleged misleading of clients on CMBS transactions (February 2018)
RBS: UK BEIS's probe into RBS's possible improper profiteering from UK government's Enterprise Finance Guarantee Scheme (January 2018)
Non-core disposals
Deal highlight
Piraeus Bank has been active in both NPL and non-core disposals in 2018, having sold a €1.45bn corporate NPE portfolio to Bain Capital and its Romanian banking subsidiary to J.C. Flowers.***
Novo Banco: Disposal of 90% of Banco Internacional de Cabo Verde (May 2018)
UniCredit: Disposal of 10% of Bank of Valleta (April 2018)
Intesa Sanpaolo: Disposal of Veneto Banka (April 2018)
Eurobank: Disposal of Bancpost, ERB Retail Services and ERB Leasing (April 2018)
Piraeus Bank: Disposal of Piraeus Bank Romania and ongoing open e-auctions of repossessed real estate assets (January – March 2018)
Deutsche Bank: Disposal of its Cayman Islands and Channel Islands banking and custody business and Private & Commercial Client Portugal (February – March 2018)
NBG: Disposal of Banka NBG Albania (February 2018)
RBS: Disposal of offshore operations of its Lombard leasing unit and 280 Bishopsgate London HQ (January – February 2018)
