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.
Consumer finance markets differ substantially across Europe. This section centres on the UK (but not exclusively), given significant levels of M&A driven by regulatory change and the resulting investor behaviour.
The UK specialty finance market is at an inflexion point. If first movers successfully IPO, access to additional capital would boost credit availability for SMEs and consumers, as well as the ABS market.
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.
Credit cards & consumer credit
Tougher rules and public scrutiny give dealmakers reason for pause.
Our M&A forecast
There are deals to be done, but activity will remain steady at best as regulation weighs on credit card providers. The UK FCA estimates its new rules could cost providers anywhere between £310 million and £1.3 billion per annum. Buyers are understandably cautious as a result.
Current market
Upward, marginal
We are seeing
Strategic and financial sponsor-led M&A
Key drivers
Healthy buyer appetite from trade consolidators and financial sponsors
Banks seeking to dispose of non-core businesses:
Concentration on core business lines and geographies
Increased operational risks (e.g., fraud)
Regulatory pressure to increase transparency and competition in the consumer credit sector
Movement towards distribution/white-labelling models
Trends to watch
Increasing regulatory burden (e.g., the UK FCA's new rules, which take effect on 1 September 2018, require credit card providers to effect a 3-year recovery process for customers in financial difficulty, ultimately requiring forbearance through reduction, waiver and/or cancellation of interest, fees and charges)
Credit card providers taking a more active role in policing 'harmful' consumer purchasing behaviours.
Payday lenders & high-cost credit
The UK watchdog keeps M&A in check.
Our M&A forecast
Players with sound customer practices will continue to attract investment and win market share. However, for most payday lenders, the focus is on bringing internal business practices into line with the UK FCA's requirements rather than deal-making.
Current market
Flat
We are seeing
Some financial sponsor support
Key drivers
Financial sponsors remaining keen on rich returns from near-prime, subprime and thin credit file borrower demographics
Increased operating and regulatory pressures — the UK FCA continues its active drive to reform and abate perceived harm to potentially vulnerable consumers
Trends to watch
Continuing high levels of regulatory scrutiny and intervention:
Particularly across overdrafts, catalogue credit, doorstep lending and rent-to-own products, which the UK FCA has identified as raising concerns
Possible expansion of the UK regulatory perimeter (e.g., introduction of price capping across more high-cost credit products)
Public outcry to end 'mega-margin' lending (e.g., Labour's campaign against high-cost credit cards)
Diversification by market players with healthier balance sheets and customer practices
Growth in the medium-term loan market
Specialty finance & marketplace lending
Stratospheric possibilities, as the first wave of platforms poise for IPO.
Our M&A forecast
High levels of M&A activity as market participants seek to capitalise on their first-mover advantages.
Brexit may also present a unique opportunity for speciality finance — while High Street banks focus more on high-margin corporate lending, speciality finance businesses can strengthen their position in SME and consumer lending niches.
Current market
Upward, significant
We are seeing
Financial sponsor-led and strategic M&A
Key drivers
Expanding universe of potential investors, including financial sponsors, banks and trade consolidators
JVs and other business partnerships between market participants and service providers
2017 fund-raising successes means larger players have well-stocked M&A war chests — larger players are expanding inorganically, while smaller ones yield to competition
Growth of new lenders, encouraged by the UK government's support for responsible consumer/SME alternative finance
Trends to watch
The UK market is at an inflection point:
First movers are poised for IPO. If IPOs are successful, that could lead to marketplace lending securitisations becoming more of a bright spot, akin to the US asset-backed securities market
As UK peer-to-peer lenders transition from interim to full UK FCA authorisation, that increases the scope for growth through product diversification (e.g., LendingCrowd's launch of Innovative Finance ISAs)
Increased single market harmonisation and regulatory oversight (e.g., European Commission's Action Plan to assist EU crowdfunding growth)
Tesco's departure limits Irish credit card consumer choice to just six providers. Avantcard has rapidly accumulated market share, having only arrived in Ireland in 2012 through the acquisition of Carrick-on-Shannon – based MBNA.
Trade consolidators:
SIA: Acquisition of First Data's card processing European operations (May 2018)
Santander: Acquisition of WiZink's Portuguese debit and credit card business (May 2018)
Sovcombank: Acquisition of Sovcomcard (April 2018)
Private equity:
Goldman Sachs: Acquisition of Final and Clarity Money (January – April 2018)
Värde Partners: Acquisition of the remaining 49% of WiZink (March 2018)
Elliott Advisors: Investment in Chetwood Financial (March 2018)
Banks disposing of non-core businesses
Tesco Bank: Disposal of Irish credit card portfolio (April 2018)
Banco Popular Español: Sale of 49% of WiZink (March 2018)
Bank Leumi: Ongoing disposal process for its controlling interest in Leumi Card (February 2018)
Bank Hapoalim: Disposal process for Isracard (February 2018)
Prudential: Disposal of Prudential Vietnam Finance Co. (January 2018)
Increasing operational risks
Inadequacy of automated accounting systems:
Citigroup: Refund of US$335m to its credit card customers (February 2018)
Growing fraud risk:
Revolut: Launch of single-use virtual cards (March 2018)
Restrictive business practices
Virgin Money: Ban on credit card customers purchasing bitcoin (February 2018)
Lloyds: Ban on credit card customers purchasing bitcoin (February 2018)
Monzo: Phase out of fee-free overseas prepaid Mastercard (January 2018)
Wider market influence
Regulatory burden:
Credit card charges on financially distressed customers: UK FCA's new rules for imposing charges on credit card customers in financial difficulty (February 2018)
Bank consumer credit risk reporting: UK PRA's requirement on banks to improve consumer credit risk reporting (January 2018)
Political pressure:
84 MPs and Which? Petition to the UK FCA to restrict 'exorbitant' unarranged overdraft charges (June 2018)
Apollo and Värde Partners: Consortium acquisition of OneMain (January 2018)
Victory Park: £35m debt investment into Oakam (January 2018)
Regulatory pressure
High-cost credit products: UK FCA's update on high-cost credit highlighted the need for increased consumer choice of high-cost credit options as well as concerns relating to certain existing products (e.g., rent-to-own and home-collected credit) (January 2018)
Increased operating risks
Provident Financial: £170m customer compensation and £2m fine relating to failures in informing customers of the true cost of its repayment option plan add-on product (February 2018)
Payday UK: Compensation of £75 per customer for erroneous credit searches (January 2018)
* White & Case LLP acted on this transaction. ** US transactions. Included for illustration of a possible future European trend. *** Source: PeerIQ (April 2018).
