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Financial institutions M&A: Sector trends - July 2017
Insight
Patrick Sarch

Financial institutions M&A: Banks

Systemically important banks are streamlining within geographic borders, continuing to generate deals through non-core disposals and strategic acquisitions

Current market

  • Upward

We are seeing

  • Run-offs/sales of financial assets and disposals of non-core businesses
  • More disposals triggered by mega-regulatory fines
  • Continued focus on intra-group re-organisations, aimed at:
    • Optimising regulatory capital, governance, operational and tax efficiencies through centralisation of regulatory permissions and maximum utilisation of EU passporting efficiencies
    • Leveraging existing relationships across legal entities, business units and functions
    • Streamlining intra-group service arrangements
    • 'Hard' Brexit contingency planning

Key drivers

  • Stronger capitalised banks are ready to grow again (and regulators are more open to this than before)
  • International buyers taking advantage of the strengthening US dollar
  • Response to potential 'deregulation' of the US banking sector (promised by the Trump administration) and optimism towards lighter UK regulation post-Brexit
  • The need to compete with 'challenger' banks

Challenges

  • But some banks:
    • Are holding out for improved market conditions with a view to generate a higher sale price and achieve a positive impact on the valuation multiple of the retained business
    • Have limited P&L capacity for losses and prefer to attempt to improve businesses before selling them
    • Are seeking to optimise use of management time and resources

Trends to watch

  • Differing prerogatives of local and supranational prudential regulators
  • Heavy reliance on central bank liquidity/funding around Europe, but government rescue funds may not be large enough to cover existing financial needs
  • Re-emergence of stronger, larger banks as acquirors
  • Many banks, including mega- banks, are streamlining within borders, moving towards leaner and simpler business models. Will banks weaken within home markets?
  • Where divestment activity is happening, it is better managed internally than ever before
  • Slow progress on developing new capital structures, but transactions are being implemented
  • Not clear whether insurance businesses will continue to justify capital strain for all larger banking groups. But who will buy them?

Our M&A forecast

A steady growth in M&A activity driven by factors such as uncertainty around the UK's regulatory equivalence post-Brexit, bullish Trump-era optimism, FX rates, and larger banks seeking to expand within newly selected core territories, while others continue with non- core disposal programmes.

 

Publicly reported examples


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