Financial institutions M&A:
Sector trends

Opportunities for M&A transactions in the European financial services sector

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Introduction

Inorganic growth strategies are key to remaining competitive and winning market share in the European financial services sector

Almost a decade after the financial crisis, most European financial institutions are still grappling with the combined effects of higher regulation, lower interest rates, the explosion of new technology, and the arrival of many new 'disruptors' that are threatening the business models of even the best-capitalised and most sophisticated banks, asset managers, insurers and other key players in the financial services sector.

Navigating the complex and rapidly evolving European financial services ecosystem can be extremely challenging. In such a highly interconnected environment, individual financial services subsectors cannot—and should not—be considered in isolation.

With this in mind, our report highlights the key European M&A trends that span the main financial services subsectors, and offers insight into the outlook for M&A in each:

Banks
State-aided banks
Fintech
Asset management
Market infrastructure
Consumer credit
Insurance

European financial services
M&A trends

“In a highly interconnected
European financial services
ecosystem, individual sectors
cannot—and should not—
be considered in isolation”

Banks

By Patrick Sarch

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

Financial institutions M&A: Sector trends - July 2017

03 Jul 2017 Insight

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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State-aided banks

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State-aided banks

By Richard Pogrel

Increasing pressure from the ECB and local regulators—alongside challenges faced by government stability funds—is continuing to drive M&A

Financial institutions M&A: Sector trends - July 2017

03 Jul 2017 Insight

Financial institutions M&A: State-aided banks

Increasing pressure from the ECB and local regulators— alongside challenges faced by government stability funds—is continuing to drive M&A

Current market

Upward, significant

We are seeing

Strategic M&A deals
Financial sponsor interest
NPL management and disposals
Non-core disposals
Bank consolidations
M&A activity involving government stability funds

Challenges

Government stability funds' exit strategies are under pressure. Temporary financing measures are necessary to allow breathing space as auction processes are becoming increasingly challenging. Stability funds' pockets are not deep enough to finance temporary measures while auctions are run
Rising borrowing costs for struggling banks
Few committed buyers and tough deal financing market conditions
Hard to sell to the market while governments attempt to redefine regulatory landscapes
Stringent auction process rules
Private equity buyers seeking to extract buyer-friendly deal protection from sellers
Buyer sentiment adversely impacted by inconsistent attitude towards implementation of EU legislation
Heightened litigation risk: 'private' litigation from market participants' reaction to government action, 'public' litigation from regulatory inconsistency and 'public' litigation from application of new Member State regulatory reforms

Trends to watch

There is a perception that local prudential regulators are being lenient on sellers. But it is not clear whether direct supervision of Significant Institutions by the European Central Bank will result in strict compliance with resolution ability
Conflict between antitrust and prudential regulatory imperatives continues to complicate processes

Our M&A forecast

A constant flow of M&A activity as EU governments seek to offload 'good' banks, and the European Central Bank exerts pressure on market participants, especially across Italy, Greece, Spain and Portugal.

Publicly reported examples

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Fintech

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Fintech

By Guy Potel

Regulator and financial sponsor support is at an unprecedented high. Fintech is now regarded as an enabler rather than a disruptor

Financial institutions M&A: Sector trends - July 2017

03 Jul 2017 Insight

Fintech

Financial institutions M&A: Fintech

Regulator and financial sponsor support is at an unprecedented high. Fintech is now regarded as an enabler rather than a disruptor

Current market

Upward, significant

We are seeing

Strategic M&A deals
Interest from financial sponsors and new entrants

Key drivers

First signs of tangible fintech success whets appetite
Paradigm shift in how established financial institutions view fintech services. Fintech is embraced as an enabler of financial services rather than as a disruptor of traditional models
Top-down support for fintech businesses. In the UK, for instance, the Government's push to making the UK a 'global capital of fintech' has provided the UK Prudential Regulation Authority (PRA) and the FCA with increased resources to ease the regulatory bottleneck. But the UK faces stiff competition
Progressive regulatory and supervisory approach. Both the PRA and the FCA are acutely aware of their roles in ensuring the UK is 'open for business' in the run up to and beyond Brexit

Trends to watch

Financial sponsor interest in fintech
Competition for existing customer bases and profit margin pressures have forced global banks and insurers to look for new ways of attracting consumers. Fintech could offer the just-in-time personalised service and intuitive end-user experience that retail banks are searching for
Opening up new markets. Fintech could afford innovative avenues for reaching significant unbanked and under-banked communities in China, Africa, India and SE Asia
Optimising existing customer bases. Fintech could offer the enhanced quality of analytics required to process and maximise usage of the large volumes of data already generated by banks and insurers
New efficient and cost-effective service provision models. Fintech could be the answer to re-architect archaic legacy IT systems that are a drain on internal resources

Our M&A forecast

Fintech is an M&A hotbed for financial sponsors and established financial institutions, as established financial institutions seek to decommission old technology, catch up with innovation from new entrants and meet growing compliance requirements.

Software majors will continue adding new technology to deepen the offering to financial service providers, particularly online wealth management, data-driven consumer lending platforms and cybersecurity.

'Regtech' could potentially de-clutter intertwined data sets and reduce configuration time for reporting. Existing market players will continue consolidating to take advantage of synergies, acquire new talent and access new markets particularly in the payments space.

But questions remain whether banks can really replace legacy IT systems with blockchain and when business valuations will start to factor into the future value of proven innovation.

Publicly reported examples

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Asset management

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Asset management

By Gavin Weir

Increasing competition, pressure on costs and changes in investor behaviour have already led to some consolidation in the industry. Much more is on the horizon

Financial institutions M&A: Sector trends - July 2017

03 Jul 2017 Insight

Financial institutions M&A: Asset management

Increasing competition, pressure on costs and changes in investor behaviour have already led to some consolidation in the industry. Much more is on the horizon

Current market

Upward, significant

We are seeing

Movement away from traditional fund management models
Increased regulatory burden
Technological developments
Lower margins (costs and competition from passive strategies)
Disruptive behaviour/new entrants
FCA review of fund management industry

Key drivers

Increased use of passive investment strategies
Asset managers are responding to increased competition from 'alternative' service providers
Established banks seeking to shore up balance sheets through non-core disposals
Consolidation driven by economies of scale and synergies
Global players focusing on key growth markets
Growing international, private equity and 'non-traditional' buyer interest in asset and management businesses
New technology and emergence of disruptive new entrants
Market disruption from regulatory change:
- MiFID II, which is expected to lead to higher overhead costs due to restrictions on commission-based arrangements with brokers and more stringent fee transparency requirements
- EU GDPR, which will necessitate significant upfront investment and lead to higher ongoing compliance costs due to direct compliance obligations on both controllers and processors of customer data as well as elevated reporting standards

Challenges

Local regulatory intervention (e.g., UK Financial Conduct Authority's (FCA)) lashing out at the charging of 'dealing commissions' for research and French Autorité des marchés financiers' consultation into conditions for implementing redemption gates on open- ended funds)
Brexit

Trends to watch

Market consolidation, as asset managers seek to build scale in response to shrinking profit margins and rising regulatory costs, across all market participants
Increasing customer expectations. UK fund managers are expanding into international markets to meet growing customer demand for global products
Competing with international fund managers in European markets
Jostling for preeminent service provider status amidst ongoing market structure changes, for example, becoming the 'go to' provider of high-margin products/ services
Reaction to disruption from fintech innovation
China and US inbound investment into Europe (weaker £/€ means cheaper for US/China buyers)
Some banks stepping back from asset management while others stepping up

Our M&A forecast

Significant uptick in consolidation activity at all levels of the market and growing international buyer interest. A number of notable market players have already announced consolidation plans.

Publicly reported examples

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Market infrastructure

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Market infrastructure

By James Greig

Regulatory change continues to be a key driver of M&A activity

Financial institutions M&A: Sector trends - July 2017

03 Jul 2017 Insight

Financial institutions M&A: Market infrastructure

Regulatory change continues to be a key driver of M&A activity

Table of contents

Payment systems / e-money providers

Trading platforms

Financial benchmarks

Custodians

Payment systems / e-money providers

Current market

Upward

We are seeing

Strategic M&A deals and financial sponsor interest

Key drivers

Market participants are forced to scale up to meet reduced profitability resulting from new regulations
Increasing operating costs resulting from additional regulatory burden and increasing litigation risk in connection with multilateral interchange fees
Competition from a growing range of alternative services and innovators

Trends to watch

Private equity interest in payment service providers

Our M&A forecast

Relatively steady M&A levels. Main motivation is likely to include competition with established market participants, compounded by disruption by innovators

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Trading platforms

Current market

Upward, high levels of activity

We are seeing

Strategic M&A deals

Key drivers

Market consolidation globally and regionally, but some signs of platforms concentrating efforts within 'home continent' markets

Trends to watch

Co-operation and operational harmonisation between exchanges through joint ventures and other forms of strategic alliance, prompted by the European Central Bank under Target2-Securities
Vertical integration and inorganic growth into clearing, custody and financial information service provision

Our M&A forecast

An uptick in market consolidation. Main motivation is likely to include regulatory change, such as MiFIDII expanding the types of trading venues which are regulated

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Financial benchmarks

Current market

Upward, significant levels of M&A

We are seeing

Strategic M&A deals

Key drivers

Increasing operating costs resulting from the burden of new regulation and heightened regulatory enforcement action risk from both EU and non-EU regulators

Trends to watch

A smaller number of market participants having sufficient infrastructure to support a benchmark administration business, given the FCA in effect treats administrators as 'mini-regulators' vis-à-vis their data submitters
Uncertain profit margins

Our M&A forecast

Slow-down in M&A activity. Many businesses have already upscaled their operations, but a further 'thinning of the herd' is likely. Main motivations are the new EU Benchmark Regulations, which will bring a number of new benchmarks within the regulatory perimeter, the rise in regulatory and private litigation risk, and data contribution contracts that are becoming trickier to negotiate

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Custodians

Current market

Flat, with a dip in the levels of M&A

We are seeing

Strategic M&A deals
Non-core disposals by banks, but some custodians with robust balance sheets focus on organic growth in terms of product lines and jurisdictional coverage

Key drivers

Increasing operating cost bases and heightened regulatory enforcement action risk following regulatory reforms
Rise in outsourcing arrangements, with BNY Mellon, State Street, J.P. Morgan and Citi remaining predominant. But other market participants are making inroads

Trends to watch

Private equity consolidators

Our M&A forecast

Uptick in consolidation M&A. Competition from Central Securities Depositories (CSDs) is one of the main drivers. Due to The EU Central Securities Depositories Regulation, CSDs face increasing competition and are encroaching on custodians

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Publicly reported examples

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Consumer credit

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Consumer credit

By Hyder Jumabhoy

With many larger banks focusing on corporate lending, consumers are turning to alternative finance sources, potentially heralding a new era of inorganic growth for specialty finance businesses

Financial institutions M&A: Sector trends - July 2017

03 Jul 2017 Insight

Financial institutions M&A: Consumer credit

With many larger banks focusing on corporate lending, consumers are turning to alternative finance sources, potentially heralding a new era of inorganic growth for specialty finance businesses

Consumer credit markets differ substantially across Europe. This section focuses on the UK given significant levels of M&A driven by regulatory change and the resulting investor behaviour.

Table of contents

Credit cards

Payday lenders

Specialty finance/marketplace lending

Credit cards

Current market

Flat

We are seeing

Strategic M&A deals and financial sponsor interest

Key drivers

Excluding megadeals, broadly, M&A levels have been adversely impacted by financial sponsor focus on more lucrative NPL investment returns
Credit cards have a higher risk profile under the Consumer Rights Act 2015, and banks seek to dispose of non-core high-risk profile business units and move to distribution/white- labelling models
Banks seeking to limit exposures to liability for mis-selling of PPI

Trends to watch

Interest in consumer credit portfolios from trade consolidators and private equity

Our M&A forecast

M&A activity levels to remain relatively steady

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Payday lenders

Current market

Flat

We are seeing

Strategic M&A deals

Key drivers

Reduced profitability, following the FCA's imposition of price caps on high-cost short-term credit with effect from 2 January 2016
Increased operation costs, following the FCA's regulation of consumer credit firms with effect from 1 April 2014
Increased operating/regulatory risks
Increased litigation risks, following on from enhanced consumer protection rights under the Consumer Rights Act 2015

Trends to watch

'Thinning of the herd'

Our M&A forecast

An increase in M&A activity driven by market participants upscaling to meet increasing operating costs and lower profit margins, and diversifying their product/service offering

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Specialty finance / marketplace lending

Current market

Upward

We are seeing

Strategic M&A deals and financial sponsor interest

Key drivers

Success of marketplace lending securitisation, which has increased availability of capital and financial sponsor interest in providers
Material successes in recent fund raisings mean larger players have well-stocked M&A war chests
More partnerships, as established banks actively seek access to new customer bases. Established banks' confidence seem to have recovered, although they are now more focused on adequate diligence before entering into joint ventures

Trends to watch

Increased consolidation activity
Growth of new and established lenders driven by government support for responsible alternative finance for SMEs
As Brexit looms, specialty finance providers have perhaps found their niche as providers of alternative finance for SMEs and short-term finance for consumers, while High Street banks focus more on high-value commercial lending
M&A activity has been dampened by heightened regulatory investigation/enforcement action and consumer litigation risk. Are poor internal systems and controls systemic across internet-based consumer lending platforms?

Our M&A forecast

An increase in M&A activity from market participants which have enjoyed first-mover advantage, but that increase may take a while. Market participants are likely to focus on their own product/service offerings and distribution models, and reorient themselves to comply with expected p-2-p lending regulations, in the short term

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Publicly reported examples

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Insurance

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Insurance

By Roger Kiem

Favourable environment for insurance M&A including ongoing consolidation in the life insurance sector

Financial institutions M&A: Sector trends - July 2017

03 Jul 2017 Insight

Financial institutions M&A: Insurance

Favourable environment for insurance M&A including ongoing consolidation in the life insurance sector

Current market

Upward

We are seeing

Strategic M&A deals
Significant consolidation as soft market and higher capital requirements are driving potential for consolidation in general/ reinsurance sectors
Intra-group reorganisations

Key drivers

Appetite to replicate UK back- book consolidation around Europe
Asset availability as EU banks offload non-core assets
Market participants searching for growth outside primary markets
Financial sponsor interest in insurance assets
Heightened US/China inbound interest in insurance assets
Global Systemically Important Insurers reducing Solvency II/ regulatory capital requirements by shedding capital-intensive business lines

Trends to watch

Solvency II and Senior Insurance Managers Regime require a full list of those in key functions to be set out in a governance map showing clear lines of reporting and organisational responsibility. This is driving intra-group reogranisations aimed at optimising regulatory capital efficiencies, in lieu of the new risk-based Solvency II requirements, and improving corporate governance structures
Searching for growth and higher profit margins outside primary markets
Ongoing consolidation in the life sector
Investment in fintech

Our M&A forecast

Sustained levels of M&A across Europe driven by continued pressure on the Global Systemically Important Insurers to exit legacy and non-core portfolios and focus on capital redeployment to escape additional operational and regulatory burden of the 'SIFI' designation.

Publicly reported examples

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Financial institutions M&A: Sector trends

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2017 White & Case LLP

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Financial institutions M&A: Sector trends

European financial services M&A trends

“In a highly interconnected European financial services ecosystem, individual sectors cannot—and should not— be considered in isolation”

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Our M&A forecast

Publicly reported examples

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Our M&A forecast

Publicly reported examples

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Our M&A forecast

Publicly reported examples

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Our M&A forecast

Publicly reported examples

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Payment systems / e-money providers

Our M&A forecast

Trading platforms

Our M&A forecast

Financial benchmarks

Our M&A forecast

Custodians

Our M&A forecast

Publicly reported examples

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Credit cards

Our M&A forecast

Payday lenders

Our M&A forecast

Specialty finance / marketplace lending

Our M&A forecast

Publicly reported examples

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Our M&A forecast

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Financial institutions M&A:
Sector trends

European financial services
M&A trends

“In a highly interconnected
European financial services
ecosystem, individual sectors
cannot—and should not—
be considered in isolation”