Financial institutions M&A: Sector trends - December 2017
Opportunities and challenges for M&A in the European financial services sector
Progress 2017/Predictions 2018
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:
UK consumer credit
European financial services
“Successful implementation of
inorganic business transformation
strategies is a key solution for
remaining competitive and winning
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.
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.
Credit cards: Activity flat with banks under pressure to move away from riskier business lines
A combination of banks seeking to limit PPI misselling liabilities, pressure to dispose of higher risk credit card businesses (and move to 'white-labelling' models), and financial sponsors being attracted by higher IRR of NPL deals have all weighed on deal activity in the credit card space. A handful of megadeals, like Lloyds' purchase of MBNA, and interest in some credit card portfolios from trade consolidators and private equity, will provide some bright spots, but overall M&A activity is likely to remain steady.
Our 2018 M&A forecast: Credit cards
M&A activity levels will remain steady as banks re-assess consumer credit risks.
Payday lenders: Only those with healthy customer practices will continue to win market share
The imposition of price caps on payday lenders by the Financial Conduct Authority have reduced revenues and pushed up compliance costs. Enhanced consumer protection rights under the Consumer Rights Act 2015 have added an extra layer of risk. This has knocked M&A activity in payday lending, but dealmaking could start recovering, as the herd thins and remaining market participants turn to M&A as a tool for building scale in order to reduce costs and diversify product offerings.
Our 2018 M&A forecast: Payday lenders
M&A activity flat. Market is likely to continue to shrink as a result of regulator intervention. Only businesses with the healthiest consumer practices will survive and thrive.
Specialty finance and marketplace lending: On the deal radars of banks and private equity firms
Specialty and marketplace lenders are expected to remain busy. Banks are actively seeking ways to build partnerships with specialty lenders in order to tap into new customer bases, while financial sponsors have been drawn by fast growth and buy-and-build consolidation opportunities. Compliance with new P2P lending rules and a focus on existing service lines may see some key players step back from dealmaking in the short term. Government support for responsible alternative finance, however, and the niche that specialty lenders are carving out as providers of finance to consumers and SMEs, should bolster deal flow.
Our 2018 M&A forecast: Specialty finance and marketplace lending
High levels of M&A activity. Specialty and marketplace lenders are likely to remain busy as Brexit creates a niche in consumer and SME markets.