Financial institutions M&A:
Sector trends

The first wave of bank consolidation has reached European shores. We expect market forces to stir the long-awaited groundswell of mega crossborder deals in the next 18 months.

Patrick Sarch, Partner, London, Co-head of Financial Institutions Global Industry Group

M&A across Europe heats up. Banks resort to regional and domestic consolidation as they look to cement market share and complement existing product and service offerings.

Overview

Three key drivers for bank M&A:

• Consolidation across Europe: Gaining scale and scope to survive
• Skill of the trapeze: Active balance sheet management remains critical
• Digital transformation: Banks attempt the trifecta in the fintech race

CURRENT MARKET

Upward, significant

WE ARE SEEING

• Continuing focus on intra-group corporate restructurings, primarily aimed at:
  • Implementing "hard" Brexit contingency plans, including through subsidiarisation and re-architecture of balance sheets
  • Achieving operational efficiency and simpler business models, without the financial burden of overlapping back-office functions
• Balance sheet management by both non-state-aided and state-aided banks:
  • Continuing non-core disposal programmes
  • Rationalisation of loan portfolios through NPL disposals and outsourcing of debt-servicing functions
• High levels of bank consolidation activity:
  • Mainly domestic and regional consolidation
  • Activity across established as well as "challenger" lenders
  • Geographic hotspots include the Balkans, CEE, the Nordics, the Mediterranean, Germany and Italy
• Heavy outlay on fintech by established lenders:
  • Growing appetite for new customer-experience, payments and compliance-monitoring technologies
  • Investment through multiple channels, including incubators/start-up support, dedicated investment funds, direct investments, in-house development and partnerships
  • Ascendancy over the open-banking landscape (particularly ING, HSBC, Barclays, Société Générale, Intesa Sanpaolo and KBC)
• Influx of new entrants into the European lending market:
  • Organic and inorganic growth of "challenger" banks
  • Fintechs securing banking licences and offering traditional banking products and services
  • Consumer/tech majors backing "favoured" credit providers

KEY DRIVERS

• Seeking scale, scope and new technology to defend/increase market share:
  • Fierce competition across the lending landscape from growing "challenger" bank offerings
  • Availability of seed and growth capital boosting the number of "challenger" banks
  • Mounting activist pressures, aimed at re-focusing core activities and improving shareholder returns
• Increasing agitation of supranational and domestic regulators for banks to find workable solutions for Europe's NPL conundrum
• Wide universe of potential buyers for non-core businesses and financial assets, including financial sponsors, non-European strategic investors, ultra-high-net-worth individuals and tech conglomerates
• US inbound investment into Europe—raising of the SIFI threshold from US$50 billion to US$250 billion and easing of restrictive US bank regulation

TRENDS TO WATCH

• Additional rigour in the quest to become the pan-European champion—possibility of mega-deals
• End of the decade-long dormancy—re-emergence of cross-border strategic M&A
• Wall Street behemoths flexing expansion muscles (e.g., Goldman Sachs's Marcus)
• Established banks challenging the digital "challengers" (e.g., RBS's Mettle and Bó)
• Impact of M&A on IT system robustness (e.g., TSB Bank's IT outage as it attempted to sever legacy dependences on Lloyds, BoE's new "cyber stress tests", etc.)

Our M&A forecast

Strong growth in M&A activity as regional and domestic banks consolidate to combat competition and return to profitability, with the support of governments and regulators. Banks with stronger balance sheets are ready to grow again, and the ambitious will vie for prime pan-European coverage.

Bank consolidation hotspots

Cross-border bank mergers promise eye-catching expansion opportunities and operational synergies, but are notoriously tricky to successfully implement.

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"Digital 'challengers', including the likes of Klarna, Holvi and Lunar Way, are forcing established incumbents to re-focus their strategies to retain market share and compete for control of the customer experience."
—Darragh Byrne, Partner, Stockholm/Frankfurt

"Market consolidation is not an exclusively European phenomenon. Fragmented markets across the Middle East have forced local rumour mills into overdrive as domestic players pursue merger opportunities."
—Marcus Booth, Partner, Dubai/London

"Poland, Serbia, Albania and Bulgaria are just some of the countries which have experienced significant financial sponsor and domestic strategic investor- led consolidation activity in the last 6 months. That activity is likely to intensify as the quest to become the regional champion continues."
—Jan Andruško, Partner, Prague

6 THINGS TO THINK ABOUT WHEN CONSIDERING A BANK MERGER

Having advised on a number of market-leading and complex bank consolidations in recent years, here are 6 things we encourage our clients to consider:

1. Structure

• What is stakeholder appetite for the merger? Is it possible to lock in support early from key stakeholders?
• How will each merging bank be valued?
• How will the merger be structured from a legal/mechanical perspective?
• Are there any parts of the merging banks which would be excluded from the consolidation?

2. Timeline

• What is the proposed timeline for the merger?
• How would the proposed timeline be impacted by mandatory CPs?

3. Transaction management

• Are all directors aware of their legal/regulatory obligations?
• Are any key stakeholders independently advised?
• Are any share-dealing restrictions triggered?
• Are any public announcement obligations triggered?
• What is the plan for and proposed scope of due diligence? Are there any information restrictions triggered?

4. Integration planning—perhaps the most important aspect

• What preparation has gone into integration planning?
• Have the right specialist advisers been engaged?
• Key integration considerations include post-merger governance framework, regulatory capital structure & planning, compliance systems & controls and communications plans covering employees, customers, key business counterparts and suppliers

5. Transaction certainty

• What financial regulatory approval/notification requirements would be triggered?
• What is the proposed process for testing the merger with relevant regulators ahead of implementation?
• Which of the merging banks will be responsible for securing relevant financial regulatory consents?
• Are any local/regional antitrust or other state notifications/approvals triggered?
• Are any other material shareholder/third-party consents required?

6. Regulatory matters

• Each merging bank will be particularly focussed on regulatory due diligence on the other, particularly around:
  • Scope of financial licences/permits required by the merged bank to operate the businesses of each merging bank
  • Existing regulatory and compliance strengths and weaknesses of the other merging bank
  • The impact of any upcoming regulatory changes on the other merging bank's business model
  • The preparedness of the other merging bank to comply with any new regulatory regimes
• Deal timetables are often extended due to interaction with financial services regulators. Key contributing factors include:
  • Parties taking longer to complete their due diligence, since regulatory diligence is as much about the future as it is about the past
  • Regulators' increased scrutiny of forward-looking business plans and the effect the merger will have on the merging banks' customers as well as the stability of the local financial services market more generally
  • Regulators requiring changes to post- merger governance arrangements

Banks—Publicly reported deals & situations

Restructurings

25 banks were reported to be in "well-advanced" talks with the European Central Bank to secure EU banking licences as of November 2018*

Brexit planning (outbound):

• Barclays: Migration of £200 billion of European assets from UK to Dublin and double Irish employee headcount (December 2018)
• RBS: Application for German banking license and migration of £6 billion of balance-sheet assets and £7 billion of liabilities from UK to Dutch subsidiary NatWest Markets (December 2018)
• Bank of America Merrill Lynch: Merger of London banking unit into Irish subsidiary (December 2018)
• J.P. Morgan: Migration of US$283 billion balance-sheet assets from UK to Frankfurt and growth of Frankfurt subsidiary (November 2018)
• Lloyds Bank: Establishment of life insurance operating subsidiary in Luxembourg (September 2018)
• Deutsche Bank: Shift of US$351 billion from UK to Frankfurt and establishment of UK branch (September 2018)
• J.P. Morgan: Migration of commercial banking to Luxembourg and merging of its European wealth management business with Luxembourg office (September 2018)

Brexit planning (inbound):

• ABN AMRO: Application for UK banking licence and establishment of new UK clearing subsidiary (November 2018)
• Handelsbanken: Successful grant for UK banking licence (November 2018)
• Citigroup: Establishment of Citibank UK to service Citigold and other UK consumer clients (October 2018)

Other restructurings:

• Nordea: Cross-border reverse merger to move its HQ from Stockholm to Helsinki (October 2018)
• Santander: Transfer of £22.9 billion and £20.7 billion of assets and liabilities, respectively, from UK to Madrid to comply with UK ring- fencing rules (September 2018)
• Intesa Sanpaolo: Mergers with IMI Investimenti and Banco di Napoli (July 2018)
• Getin Noble Bank: Merger with BPI Bank Polskich Inwestycji (June 2018)

Disposals of non-core assets

Non-state-aided banks:

• Société Générale: Disposals of 35% of La Banque Postale Financement, Société Générale Srbija, 2.05% of Euroclear, majority stake in Société Générale Expressbank, majority stake in Banka Société Générale Albania and its Belgian private banking unit (July – December 2018)
• CaixaBank: Disposal of Servihabitat business and 80% of real estate assets (December 2018)
• Danske Bank: Disposal of Danica Pension (December 2018)
• Nordea: Disposal of Nordea Ejendomme (November 2018)
• Nordea and DNB: Disposal of 60% of Luminor Bank (September 2018)
• Standard Chartered: Disposal of principal finance investment business (August 2018)
• Schroders: Disposal of its Eastern European banking business (July 2018)
• Banco do Brasil: Disposal of stake in Mapfre BB SH2 Participaçoes (June 2018)
• Deutsche Bank: Disposal of Deutsche Bank Alternative Fund Services (June 2018)

States go the extra mile for state-aided banks:

• Cyprus Cooperative Bank: European Commission provided state aid of €3.5 billion to Cyprus Cooperative Bank, including counter-guarantees and an asset protection scheme to Hellenic Bank, in connection with Hellenic Bank's acquisition of certain assets from Cyprus Cooperative Bank (June 2018)

State-sided banks:

• Bankia: Disposal of 51% stakes in Caja Granada Vida de Seguros y Reaseguros and Cajamurcia Vida y Pensiones de Seguros y Reaseguros (December 2018)
• Banco BPM: Disposal of Profamily (December 2018)
• Piraeus Bank: Disposals of Piraeus Bank Bulgaria, Tirana Bank and Piraeus Bank Romania (June – November 2018)
• Banca Monte dei Paschi di Siena: Disposal of Banca Monte Paschi Belgio (October 2018)
• National Bank of Greece: Disposal of 99.83% of South African Bank of Athens and NBG Albania (July – October 2018)
• Bank of Cyprus: Disposal of Bank of Cyprus UK (July 2018)

NPL management

Deal highlight

White & Case advised the four systemically important Greek banks—Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank—on their entry into an innovative and groundbreaking NPL servicing agreement with Italian credit institution doBank

Deal highlight

White & Case advised Piraeus Bank on the sale and transfer of a €2.238 billion portfolio of non-performing, denounced unsecured retail consumer and credit card exposures to APS Investments

Non-state-aided bank disposals:

• Bank Norwegian: Disposal of €160 million of Finnish credit card and personal loans (October 2018)
• Bankinter: Disposal of €362.2 million of NPLs (August 2018)
• KBC Bank Ireland: Disposal of €1.9 billion of buy-to-let mortgage loans (August 2018)
• Banco Sabadell: Disposal of €3.9 billion of real estate loan portfolio (July 2018)
• UniCredit: Disposals of €537 million and €124 million of NPLs (June – July 2018)
• Crédit Agricole: Disposal of €450 million of unlikely-to-pay loan portfolio (June 2018)
• Deutsche Bank: Disposal of US$1 billion ship NPLs (June 2018)

State-sided bank disposals:

• Bank of Cyprus: Disposal of €2.80 billion of NPLs (August 2018)
• Ulster Bank: Disposal of €1.4 billion of NPLs (August 2018)
• Nova Kreditna Banka Maribor: Disposal of first-lien corporate debt and loan portfolio (August 2018)
• Monte dei Paschi: Disposal of US$160 million of NPLs (August 2018)
• Permanent TSB: Disposal of €2.1 billion of NPLs (July 2018)
• Piraeus Bank: Disposal of €385 million of NPLs (June 2018)
• National Bank of Greece: Disposal of €2 billion of NPLs (June 2018)

Deal highlight

White & Case advised BC Partners and Louvre Bidco on the combination of the MCS group and the DSO group, both active in the French credit management space

Outsources debt servicing:

• Piraeus, Alpha Bank, Eurobank and National Bank of Greece: Servicing of €150 million of NPLs by KKR's Notos Com Holdings (July 2018)

Availability of third-party service providers:

• MCS-DSO: Acquisition of Serfin (November 2018)
• Hoist Finance: Acquisition of Maran (October 2018)
• DSO Group & MCS Groupe: Merger (October 2018)
• SANNE Group: Acquisition of AgenSynd (September 2018)

Strong financial sponsor interest:

• Axactor: Acquisition of €160 million of Finnish credit card and personal loans from Bank Norwegian (October 2018)
• Apollo: Acquisition of €2.80 billion of mortgage NPLs from Bank of Cyprus (August 2018)
• Goldman Sachs: Acquisition of €1.9 billion of buy‑to-let mortgage loans from KBC Bank Ireland (August 2018)
• Cerberus: Acquisition of €1.4 billion of NPLs from Ulster Bank (August 2018)
• Arrow Global: Acquisition of €362.2 million of NPLs from Bankinter(August 2018)
• AnaCap Financial Partners: Acquisition of first-lien corporate debt and loan portfolio from Nova Kreditna Banka Maribor (August 2018)
• SC Lowy: Acquisition of US$160 million of NPLs from Monte dei Paschi (August 2018)
• Lone Star: Acquisition of €2.1 billion of NPLs from Permanent TSB (July 2018)
• APS: Acquisition of €385 million unsecured consumer NPLs from Piraeus Bank (June 2018)
• CarVal Investors and Intrum: Acquisition of €2 billion consumer and SME NPLs from National Bank of Greece (June 2018)
• Oak Hill Advisors and Värde Partners: Acquisition of US$1 billion ship NPLs from Deutsche Bank (June 2018)

Transfers to independent securitisation vehicles:

• Unione di Banche Italiane: Tranfer of €2.75 billion of NPLs to Maior SPV (August 2018)

Market consolidation

"Challenger" banks:

• MONETA Money Bank (Czech Republic/CEE): Acquisition of Air Bank and Home Credit Czech Republic and Slovakia (October 2018)
• CYBG (UK): Acquisition of Virgin Money Holdings (October 2018)

Government driven:

• Iccrea Banca (Italy): Establishment of new banking group for smaller Italian banks (July 2018)

Regional/domestic consolidation:

• CaixaBank (Portugal): Acquisition of remaining 5% of Banco BPI (December 2018)
• Sparebank 1 SMN (Norway): Acquisition of DeBank (December 2018)
• OTP Bank (Serbia/CEE): Acquisition of Société Générale Srbija (December 2018)
• Econombank & Metcombank (Russia): Merger (December 2018)
• Wüstenrot Bausparkasse (Germany): Acquisition of Aachener Bausparkasse (December 2018)
• Société Générale de Banque–Jordanie (Jordan): Acquisition of First Abu Dhabi Bank PJSC (Jordan) (December 2018)
• Banca del Fucino & Igea Banca (Italy): Merger (November 2018)
• Abanca Corporación Bancaria (Spain): Acquisition of Banco Caixa Geral (November 2018)
• Fondazione Cassa di Risparmio di Cuneo (Italy): Acquisition of Fondazione Cassa di Risparmio di Bra (November 2018)
• OTP Bank/DSK Bank (Bulgaria/CEE): Acquisitions of majority stake in Société Générale Expressbank and majority stake in Banka Société Générale Albania (August – November 2018)
• EBRD (Slovenia): Acquisition of 6.25% of Nova Ljubljanska banka (November 2018)
• Santander Bank Polska (Poland): Acquisition of >10% of Deutsche Bank Polska (November 2018)
• BaikalInvestBank & Bank Realist (Russia): Merger (November 2018)
• Eurobank Bulgaria (Bulgaria): Acquisition of Piraeus Bank Bulgaria (November 2018)
• Bank Millennium (Poland): Acquisitions of Euro Bank and SKOK Piast (October – November 2018)
• VTB Bank (Russia): Acquisitions of West Siberian Commercial Bank, 81% of Sarovbusinessbank and Vozrozhdenie Bank (September – November 2018)
• Banca Popolare del Lazio (Italy): Acquisition of Banca Sviluppo Tuscia (November 2018)
• Bank BGŻ BNP Paribas (Poland): Acquisition of Raiffeisen Bank Polska (October 2018)
• Banco Popolare di Sondrio (Italy): Acquisition of majority stake in Cassa di Rispamrio di Centro (October 2018)
• Basler Kantonalbank (Switzerland): Acquisition of Bank Cler (October 2018)
• Sigma Kreditbank (Liechtenstein): Acquisition of Volksbank Liechtenstein (September 2018)
• Santander (Spain): Acquisition of Banco Popular Español (September 2018)
• Bankinter (Spain): Acquisition of EVO Banco Spain (September 2018)
• Bank Pocztowy (Poland): Acquisition of SKOK Jaworzno (September 2018)
• Aareal Bank (Germany): Acquisition of Düsseldorfer Hypothekenbank (September 2018)
• Nordea (Norway): Acquisition of Gjensidige Bank (September 2018)
• Bremer Kreditbank & Oldenburgische Landesbank (Germany): Merger (August 2018)
• Unipol Gruppo (Italy): Acquisition of 15% of BPER Banca (August 2018)
• Komercijalna Banka (Balkans): Consortium (with Balfin) acquisition of Tirana Bank (August 2018)
• Halyk Savings Bank & Kazkommertsbank (Kazakhstan): Merger (July 2018)
• TBC Bank & Nikoil Bank (Azerbaijan): Merger (July 2018)
• Hellenic Bank (Cyprus): Acquisition of Cyprus Cooperative Bank (July 2018)
• Banco CTT (Portugal): Acquisition of 321 Credito (July 2018)
• Deutsche Bank Polska (Poland): Demerger involving Bank Zachodni (July 2018)
• American Bank of Investments (Balkans): Acquisition of NBG Albania (July 2018)
• Hrvatska poštanska banka (Croatia): Acquisition of Jadranska banka (July 2018)
• Alfa Bank (Belarus/CEE): Acquisition of majority stake of Home Credit Belarus (June 2018)
• Nordax Bank (Sweden): Acquisition of Svensk Hypotekspension (June 2018)

Strategic M&A—signs of cross-border deals staging a comeback

• Swissquote Bank: Acquisition of Internaxx Bank (August 2018)
• ABN AMRO: Acquisition of Société Générale's Belgian private banking unit (July 2018)
• Crédit Agricole: Acquisition of 5% of Credito Valtellinese (July 2018)
• Investbank: Acquisition of Victoria Commercial Bank (July 2018)
• Société Générale: Acquisition of Commerzbank's Equity, Markets and Commodities business (July 2018)
• Erste Group: Acquisition of 6.29% of Banca Comercială Română (June 2018)

Fintech investment

Please refer to the 'Fintech' report in this series.

Wide buyer universe

Private equity:

• Lone Star: Acquisition of CaixaBank's Servihabitat business and 80% of its real estate assets (December 2018)
• J.C. Flowers and Cerberus: Acquisition of HSH Nordbank (November 2018)
• Cynergy Capital: Acquisition of Bank of Cyprus UK (November 2018)
• AlpInvest Partners, LGT Capital Partners, Five Arrows and Bregal Capital: Acquisition of interests in ABN AMRO Participaties (November 2018)
• Warburg Pincus: Acquisition of Banca Monte Paschi Belgio (October 2018)
• Atlas Merchant Capital: €100 million investment in Praxia Bank (October 2018)
• Invalda and Horizon Capital: Consortium acquisition (together with EBRD) of Agroindbank (October 2018)
• Värde Partners: £60 million equity investment in Masthaven (September 2018)
• Blackstone: Acquisition of 60% of Luminor Bank from Nordea and DNB (September 2018)
• PPF Group: Acquisition of Telenor Banka (August 2018)
• Actis: Acquisition of Standard Chartered Bank's Asian principal finance unit (August 2018)
• J.C. Flowers and EBRD: Acquisition of Piraeus Bank Romania (July 2018)

Foreign strategic:

• Capitec Bank: Acquisition of Mercantile Bank Holdings (November 2018)
• Convoy Global: Acquisition of minority stake in Tandem Bank (November 2018)
• Stifel: Acquisition of Mainfirst Bank (November 2018)
• GroCapital Holdings: Acquisition of 99.83% of South African Bank of Athens (October 2018)
• REYL & Cie: Acquisition of Öhman Bank S.A. Luxembourg (September 2018)

Foreign non-bank:

• Geely Holding Group: Acquisition of 51.5% of Saxo Bank (September 2018)

Ultra-high-net-worth individuals:

• Vardis Vardinogiannis: Acquisition by Motor Oil (Hellas) Corinth Refineries of majority stake in Investment Bank of Greece (November 2018)
• Oleg Karchev: JSC Bank Realist–BaikalInvestBank JSC merger (September 2018)
• Adrian and Andreas Keller: Acquisition of 80.1% of Berenberg Bank (September 2018)
• Andrey Shlyakhovoy: Acquisition of VTB Banka Beograd (July 2018)

Fierce competition

Amazon, Google and other Big Tech companies could compete with banks for the sale of even basic retail products**

Zopa, the 13-year-old peer-to-peer lender, has become the first of its kind to be awarded a full UK banking licence. The UK regulator's decision to grant the licence marks the first major breakthrough by a P2P lender into mainstream banking***

"Challenger" banks:

• Arkea Group: Acquisition of net-m privatbank 1891 (December2018)
• Starling Bank: "High street" branch distribution JV with UK Post Office (November 2018)
• Monzo: Launch of SME lending products and successful £85 million Series E funding round, led by General Catalyst and Accel (October 2018)
• Qonto: Successful €20 million Series B funding round, led by Valar, Alven Capital and European Investment Bank Group (September 2018)
• Monese: Successful US$60 million Series B funding round, led by Kinnevik (September 2018)
• Acorn OakNorth: Successful US$100 million funding round to enable licencing of AI loan system to other banks (September 2018)
• Virgin Money: Lifetime mortgage JV (August 2018)
• RBS cashpool: Allocation of £775 million to boost UK's SME banking sector to be awarded in February 2019 (July 2018)

Fintech:

• Revolut: Successful grants of Lithuanian banking licence, Singaporean remittance licence and Japanese financial services authorisation as well as launch of open-banking enterprise marketplace for business banking customers (June – December 2018)
• Zopa: Successful grant for UK banking licence (December 2018)
• FinTech Group: Austrian banking JV with Österreichische Post Aktiengesellschaft (September 2018)
• Klarna Bank: Acquisition of Close Brothers Retail Finance unit (September 2018)

New entrants:

• Emirates NBD: Launch of DirectRemit services to the UK (August 2018)
• Solarisbank: Launch of business loan offering (August 2018)

Consumer/tech majors:

• Tencent: Launch by N26 of UK online bank offering (October 2018)

Incumbents strike back against the "challengers"

• RBS: Launch of Mettle (RBS's standalone digital SME‑focused bank) and Bó (RBS's standalone digital consumer bank) (September – November 2018)
• Barclays: Launch of US online-only checking account offering (October 2018)
• Goldman Sachs: Launch of Marcus, Goldman Sachs's UK digital consumer savings platform (August 2018)

Rise of the activist investor

Advisers bulking up:

PJT Partners: Acquisition of CamberView Partners (August 2018)

Market situations:

• Nordea/Cevian: Pressure to address revenue development decisions (November 2018)
• Barclays/Sherborne Investors: Pressure to make key governance changes and downsize Barclays' investment bank (July – November 2018)
• Deutsche Bank/Hudson Executive: Acquisition of 3.1% of Deutsche Bank to encourage traditional retail banking in Germany (November 2018)
• Credito Fondiario/Elliott: Pressure to increase profitability (August 2018)
• Citigroup/ValueAct: Acquisition of US$1.7 billion of equity and pressure to increase shareholder revenue (August 2018)
• Mediobanca/Elliott: Pressure to spin off of Mediobanca's 13.2% stake in Generali (August 2018)
• Novo Banco/Elliott and Aurelius: Pressure on Novo Banco's Tier 2 bond issuance (July 2018)
• UniCredit/Caius: Pressure to convert €3 billion of UniCredit's complex instruments into common equity (June 2018)

Open banking

New frontier:

• KBC Bank Ireland: Launch of new open banking offering through the KBC app (November 2018)
• Barclays: Launch of account aggregation feature on Barclays' mobile banking app (September 2018)
• CYBG: Launch of open banking offering with ID Co. (August 2018)
• Deposit Solutions: Successful US$100 million funding round (August 2018)
• Société Générale: Crédit du Nord is the first French bank to offer open banking (July 2018)

Regulatory encouragement:

• UK FCA and UK CMA: Financial comparison rules require banks to publish additional product information, thereby enabling customers to compare providers' account offerings (August 2018)

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FULL MAGAZINE
Financial institutions M&A: Sector trends

* Source: Reuters, November 2018
** Source: UK FCA's Strategic Review of Retail Banking Business Models (December 2018)
*** Source: Financial Times, December 2018

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2019 White & Case LLP

2018 has been a transformational year for fintech M&A. Deal values and volumes have reached new heights as established financial institutions pin hopes on well‑placed bets to deliver competitive edge and market share. VC and late‑stage investment firms are also actively stoking the fintech fire.

Outlook

The digital revolution is well underway. 3 reasons why M&A shows no signs of slowing down:

• Established financial institutions view fintech as the solution to operational challenges
• Voracious appetite of private equity, venture capital and family‑office investors
• First‑mover fintechs have achieved critical mass and are now seeking to capture market share inorganically

CURRENT MARKET

Upward, significant

WE ARE SEEING

• Banks are vigorously embracing fintech as an enabler of financial services, with significant appetite for customer experience enhancement and risk-management technologies
• Banks are deploying multiple investment strategies, including home-grown digital offerings, direct equity investment, JVs/other partnerships, cross-border innovation consortia and accelerator programmes/dedicated VC funding support
• In the other direction, fintech businesses are now considering becoming banks themselves
• And new entrants to the market include new banks with technology as part of their core DNA
• Early testing of blockchain-based back-office infrastructure, particularly for risk management and operational efficiency; though mainstream deployment appears to be some time away yet
• Financial sponsors actively participating in fundraising and providing growth capital
• Fintechs scaling-up through successful funding rounds and expanding their repertoire of products and services
• Fintechs with critical mass deploying inorganic growth strategies
• ICOs and cryptocurrency-dealing buck the trend—polarised reaction:
  • Heralded as the vanguard of the digital revolution by governments, regulators and financial institutions in some geographies (e.g., Malta and Switzerland)
  • Scorned by market participants in others (e.g., UK), who are demanding heavier regulation
• Crypto businesses gaining scale through M&A and expanding into “traditional” financial services

The fintech M&A market is growing rapidly. ‘Traditional’ institutions and financial sponsors are now having to compete head on with fintechs with critical mass in highly competitive auction  processes.
Hyder Jumabhoy, Partner, London, EMEA M&A Group

KEY DRIVERS

• Established financial institutions view fintech as the solution to operational challenges:
  • The urgency to claw back customer ownership and loyalty otherwise being lost to consumer facing technologically advanced apps
  • Margin compression from “traditional” service models— banks searching for lower cost-per-customer through digital efficiencies and compliance cost  management
  • Embracing changing customer utilisation models— banks investing in on-demand, interactive solutions as well as HR to operate them
  • Detection and prevention of cyber-attacks, identity fraud and money laundering
  • Tapping into new markets and distribution channels, including unbanked/under-banked emerging communities
• High levels of financial sponsor (i.e. private equity, venture capital and family-office) appetite:
  • Growing seller and regulator familiarity with financial sponsor ownership
  • Private equity dry powder—successful sponsors have enjoyed mega-fundraisings
  • Opportunities for platform investments/buy-and-build as well as interim value generation through out-licencing
  • Even late-stage investment firms (e.g., KKR, Warburg Pincus, SoftBank, etc.) have reaped rich multiples on exit
• Growing maturity of the fintech sector—first-movers capturing market share inorganically
• Support for fintech at all levels:
  • Transformative financial regulation bolstering innovation (e.g., PSD2)
  • Collaboration projects between EU governments (e.g., Declaration on the Creation of a European Blockchain Partnership)
  • Innovation infrastructure created by national regulators (e.g., Finanstilsynet’s regulatory “sandbox”)

TRENDS TO WATCH

• Banks coming under pressure from activist investors and other stakeholders to evidence tangible value from expensive innovation investments
• Growth in competition between national regulators to attract fintechs (e.g., UK, Germany, Ireland, Sweden, etc.)
• Emergence of more fintech unicorns, seeking scale and market share through M&A
• Consolidation of crypto exchanges—with >500 exchanges which remain comparatively alien to “traditional” investors; exchanges may need to consolidate to stabilise and maximise returns
• Fintech companies seeking full banking licences

Our M&A forecast

High and increasing level of M&A activity, with a particular focus on process efficiency, AI/machinelearning and regtech. However, innovation is expensive, and integration of new technology by established institutions is often hampered by legacy IT systems. Stakeholders will soon demand tangible returns on their capital and patience.

Publicly reported deals & situations

Banks believe the hype

Strategic investments:

• Santander: Acquisition of Albert(December 2018)
• Barclays: Acquisition of minority stakes in Form3 and Marketinvoice (August – November 2018)
• Luzerner Kantonalbank: Acquisition of minority stake in SwissSign (October 2018)
• RBS and Santander: Acquisitions of minority stakes in Vizolution (September 2018)
• Société Générale: Acquisitions of Treezor and Lumo (June – September 2018)

New business lines:

• Barclays: Launch of new digital platform across cash management, trade and working capital in Portugal, Spain, France and Ireland (September 2018)
• UBS: Launch of biometric recognition pilot project (July 2018)

JVs:

• Santander: Open banking JV with Moneybox (August 2018)
• Standard Chartered & Ant  Financial: Blockchain cross-border remittance solution JV for Hong Kong and the Philippines (June 2018)

Cross-border innovation consortia:

• J.P. Morgan, Royal Bank of Canada, ANZ, Société Générale and Santander Interbank Information: Network blockchain payments collaboration project (September 2018)
• Bank of America, Citigroup, J.P. Morgan, Goldman Sachs, Wells Fargo, BNP Paribas & Deutsche Bank: Bond issuance technology platform (June 2018)

Investment in dedicated fintech funds:

• Alfa Bank: Cornerstone investment in Corviglia Capital (October 2018)

Start-up support:

• ING Ventures: €7.5 million investment into Cobase (September 2018)
• Saxo Bank: Launch of fintech academy in Hainan, China, in conjunction with Sanya University (July 2018)
• Danske Bank: Creation of co-working space for fintechs in Belfast HQ (June 2018)

Fintech, the “enabler”— pushing the boundaries

Deal Highlight:

• White & Case advised Goldman Sachs on its equity investment in JUMO, a mobile financial services platform which enables the provision of credit and savings products to customers in Africa and Asia-Pacific

Risk management:

• UBS: Cross-border fund sales compliance JV with Investment Navigator (October 2018)

Tackling social concerns:

• Wagestream: Launch in Ireland and UK, aimed at reducing employee reliance on high-cost credit alternatives (October 2018)
• JUMO: Successful funding round, led by Goldman Sachs (September 2018)

Financial sponsors believe the hype

• Triple P Capital: Acquisition of Contemi Group (December 2018)
• NXMH: Acquisition of Bitstamp (October 2018)
• Corviglia Capital:  Launch of new US$500 million European fintech fund (October 2018)
• Belvoir Capital: Anchor investment in WMD Capital (October 2018)
• Index Ventures, Balderton Capital and Communitas Capital Led US$7 million funding round for Credit Benchmark (October 2018)
• Valar and Alven Capital: Led €20 million Series B funding round for Qonto (September 2018)
• Kinnevik: Led US$60 million Series B funding round for Monese (September 2018)
• Highland Capital Successful third fundraise of €463 million for fintech investments (June 2018)

Scaling up

Successful fundraisings:

• Credit Benchmark: Successful US$7 million funding round (October 2018)
• Qonto: Successful €20 million Series B funding round (September 2018)
• Monese: Successful US$60 million Series B funding round (September 2018)

Expanding footprints/ product lines:

• Revolut: Successful grants of Lithuanian banking licence, Singaporean remittance licence and Japanese financial services authorisation (November 2018)
• Tandem: Launch of Hong Kong digital lending offering (November 2018)
• Sonect: Cash dispenser app JV with Temenos (September 2018)

JVs:

• Marqeta: Payment cards and processing JV with Visa (October 2018)

Inorganic growth:

• Advanced Blockchain: Acquisition of Nakamo.to (December 2018)
• Kirey: Acquisition of MPM Software (November 2018)
• Credit Karma: Acquisition of Noddle (November 2018)
• Fexco: Equity investment in Cambrist (June 2018)
• Finastra Group: Acquisition of Malauzai Software (June 2018)

Top-down support for fintech continues

Governments:

• Italian government: 27th EU Member State to sign the declaration creating a European Blockchain Partnership (September 2018)

Regulators:

• Norwegian Finanstilsynet: Launch of 2019 regulatory “sandbox” (November 2018)
• French AMF: SETL to connect to Target2- Securities platform, a €1 billion ECB-run project (October 2018
• ECB: Licencing practical guide to support fintechs through the EU bank licence procedure and assessment (September 201
• Swiss FINMA: Relaxed AML rules from 2019 for Swiss fintech licence applicants with gross revenue of <1.5 million Swiss francs (August 2018)

Polarised reaction to cryptos

ICOs/Cryptocurrencies:

• Global digital currency reached US$13.7 billion in the first five months of 2018, nearly twice that of the whole of 2017*

SCEPTICISM:

• Governments:
  • UK: Veto of trading of Royal Mint’s digital gold token (October 2018)
  • UK: UK Parliament Treasury Committee 22nd Report on crypto-assets called for regulation of crypto markets siting multiple risks including cybersecurity, AML and lack of retail consumer protection due to price volatility (September 2018)
• Regulators:
  • UK Financial Conduct Authority: Launch of 2019 consultation to consider ban on sale of derivatives based on cryptocurrencies (October 2018)
  • EU Financial Action Task Force:  Licencing and regulation of cryptocurrency exchanges and encrypted wallets expected by June 2019 (October 2018)
  • FIs: Wealthify, Nutmeg and Scalable Capital: Calls for regulation of cryptocurrencies (July 2018)

SUPPORT:

• International trade bodies: International Monetary Fund encouragement of central banks to issue digital currencies to combat declining use of cash (November 2018)
• Regulators:
  • Swiss FINMA: Crypto Finance’s and Crypto Fund’s licences to distribute funds in Switzerland (June – October 2018)
  • New York State DFS: Square’s virtual currency licence (June 2018)
• FIs:
  • SIX:  Support for Amun Crypto ETF’s cryptocurrency index tracker, acquisition of minority stake in PassOn and construction of DLT-based cryptocurrency trading platform (July – November 2018)
  • SBI Group:  Acquisition of 12% of Clear Markets (July 2018)
  • Andreessen Horowitz: Raise of US$300 million fund to support cryptocurrency projects (June 2018)

Market participants seeking scale

• Bitcoin Group Acquisition of Tremmel Wertpapierhandelsbank (November 2018)
• trade.io Acquisition of Primus Capital Markets (November 2018)

Bad publicity

• Financial.org: Closure of all investors’ US$ accounts and conversion of balances to its new cryptocurrency, FOIN, which cannot be withdrawn until 2019, following UK FCA sanction (June 2018)

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Financial institutions M&A: Sector trends

^* Source: Reuters, June 2018

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Specialty finance is now viewed as a mainstream source of credit by SMEs, which has encouraged the rapid growth of lending platforms and success of direct-lending funds across Europe. Specialty finance will thrive as credit assessment criteria continue to hamper established banks.

Ashley Ballard Partner, London EMEA M&A Group

Consumer finance:* Credit cards/Consumer credit

• Deal activity involving credit card businesses blooms—trade consolidators, financial sponsors and big banks see opportunities
• Buyers scrutinise historic compliance weaknesses/strengths as well as potential impact of any upcoming regulatory changes before taking the plunge

• … Healthy buyer appetite from:
  • Trade consolidators—seeking scale and product range
  • Financial sponsors—disrupting sleepy incumbents and turning a profit
  • Big banks—international exposure and access to new cross-selling opportunities
• Sellers feeling the pressure:
  • To offload “riskier” consumer credit offerings
  • From regulators for increased market competition
• Rise of white-labelling models

TRENDS TO WATCH

• Competition from new fintech entrants, keen to expand into banking products and services (e.g., Klarna, Marqeta, etc.)
• Increasing risks associated with card businesses:
  • Heightened regulator intervention in M&A (e.g., UK CMA’s Phase 2 review of PayPal’s acquisition of iZettle)
  • Heightened regulator intervention in operational matters (e.g., European Commission’s probe into interchange fees charged on tourists’ card payments)
  • Heightened government social prerogatives (e.g., proposal for stricter mandatory credit assessment rules for consumer credit in Norway)
  • Heightened litigation risk—retailers clubbing together to stop abusive dominant behaviour (e.g., Visa’s and MasterCard’s ongoing legal battle relating to unlawful swipe fee levels)

Our M&A forecast

Lucrative  M&A opportunities exist. However, competition is stiff for assets where governments/regulators are seeking to instil market competition by encouraging sellers to offload businesses. Buyers need to carefully assess existing compliance strengths and weaknesses of targets as well as the potential impact on profitability of any upcoming regulatory changes.

Consumer finance: Payday lenders

• The sun continues to sets on deal activity involving payday lenders, as the UK FCA’s interest rate caps crush profit margins
• As one door closes, another opens—providers of alternative credit options step up to fill the void left by payday lenders crushed by the UK FCA’s interest rate caps

CURRENT MARKET

Decline

WE ARE SEEING

Dwindling financial support

KEY DRIVERS

• Deal-making has slowed as financial sponsors focus capital on more lucrative areas within the European financial services landscape
• Increased operating and regulatory pressures—the UK FCA continues to heap pressure on the remaining market players to atone for perceived harm to vulnerable consumers

TRENDS TO WATCH

• New entrants stepping up to service the market segment left vacant by exiting payday lenders:
  • Dynamic loans—interest rates decline in proportion to credit score increases (e.g., Chetwood Financial’s Livelend product)
  • Short-term loan options by regulated deposit-taking institutions (e.g., Monzo)
  • Micro-lending—smaller amounts to be repaid over several months (e.g., Oakam)
• Decline of predatory businesses practices and unjustifiably high interest rates
• High levels of regulatory oversight:
  • Possible expansion of the UK regulatory perimeter (e.g., introduction of price-capping across more high-cost credit products)
  • Active policing of customer complaints handling and mis-selling compensation payment plans

Our M&A forecast

The UK FCA has crippled mega-margin lending across the country. However, market players with safer, consumer- centric business practices may rally to avoid certain consumers being locked out of credit markets or pushed into other forms of high-cost loans.

Consumer finance: Specialty finance/ Market place lending

• The sun rises on M&A in the specialty finance space—support from established banks, financial sponsors, trade consolidators and local governments turbocharges deal-making
• Technology-led market metamorphosis continues at pace

CURRENT MARKET

Upward, significant

WE ARE SEEING

Shaken, not stirred—cocktail of established banks, financial sponsors and trade consolidators actively involved in M&A

KEY DRIVERS

• Expanding universe of potential investors:
  • Established banks—embracing the digital revolution, including through deployment of multi- boutique structures
  • VC and late-stage PE—opportunity to capture an under-serviced markets
  • Trade consolidators—conquering their own niches
  • Governments—credit availability for SMEs
• Successful IPOs, despite challenging capital market conditions
• Growth capital for market players—successful capital raisings have provided funding for organic expansion by smaller players and M&A firepower for first-movers
• Growth of new lenders, encouraged by government support for alternative finance for SMEs (e.g., Spanish Law for Promotion of Entrepreneurial Financing)

TRENDS TO WATCH

• Market at an inflection point:
  • First movers (including Amigo and Funding Circle) have enjoyed successful IPOs. Listed platforms will have access to capital necessary to turbocharge expansion plans
  • Traditional asset managers seeking to utilise peer-2-peer platforms for large-scale capital deployment (e.g., Waterfall AM’s funding of £1 billion of SME loans through Funding Circle)
  • Governments ensuring debt funding for SMEs through peer-2-peer platforms (e.g., British Business Bank’s £150 million SME funding commitment through Funding Circle)
• Consolidation of Europe-focused direct-lending funds

Our M&A forecast

High levels of M&A activity as established banks, financial sponsors and trade consolidators vie for market share amidst growing market demand. If “no-deal” Brexit replays the credit crunch, specialty finance will become an increasingly important source of working and growth financing for SMEs.

Credit cards / Consumer credit—Publicly reported deals & situations

Healthy buyer appetite

Payday lenders / High-cost credit—Publicly reported deals & situations

Bullish PE support

• Wonga: £10 million rescue by Accel Partners and Balderton Capital, ahead of collapse into administration (August – September 2018)

Increased operating risks

Growing buyer/ investor/ partner interest

Private equity/venture capital:

• Zopa: Successful £60 million funding round (led by Augmentum, Northzone and Bessemer) and £44 million funding round (led by Wadhawan Global Capital) (August – November 2018)
• Divido: Successful US$15 million Series A funding round, led by Dawn Capital and DN Capital (September 2018)
• LendInvest: Successful US$40 million funding round, led by Atomico and GP Bullhound (September 2018)
• KKR: Dutch and German SME lending JV with NEOS and Schroders (August 2018)
• Ares: Raise of €6.5 billion European direct lending fund (July 2018)

Governments:

• UK British Business Bank: £150 million of funding for Funding Circle (November 2018)

Management:

• Crowdhouse: Partial MBO (December 2018)

FI:

• Liberbank: Spanish business participation JV with October (December 2018)
• BAWAG: Acquisition of BFL Leasing (December 2018)
• Bank of New Mellon: Investment of £300 million into ThinCats (September 2018)
• Poštová banka: Acquisition of Amico Finance (August 2018)

Trade consolidators:

• abcfinance: Acquisition of G.R. Factoring (December 2018)
• EC Financial Services: Acquisition of JET Money (September 2018)
• City of London Group: Acquisition of Acorn to Oaks (July 2018)
• White Oaks: Acquisition of LDF (July 2018)
• Paragon Banking Group: Acquisition of Titlestone Property Finance (July 2018)

Vertical integration

• Waterfall Asset Management: SME loan funding JV with Funding Circle (December 2018)
• Anaxago: Launch of Anaxago Capital (September 2018)

Market inflexion point

Deal highlight

White & Case advised Amigo Holding PLC, the leading company in the UK guarantor loan space, on its £1.3 billion IPO on the London Stock Exchange

IPOs:

• Fellow Finance: Nasdaq First North IPO at €55 million valuation (October 2018)
• Funding Circle: LSE Main Market IPO at £1.504 billion valuation (September 2018)
• Amigo: LSE Main IPO at £1.504 market valuation (June 2018)

Expanding horizons:

• Zopa: Successful grant for UK banking licence (December 2018)

Regulators roll up their sleeves

• ECB: Proposal for stricter scrutiny of investment funds and other firms across the EU’s shadow-banking industry (September 2018)

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FULL MAGAZINE
Financial institutions M&A: Sector trends

Source: *Non-EU transaction. Included for illustration of possible future European trends

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2019 White & Case LLP