Decline in banking M&A is a fundamental shift, not just a cyclical downturn

16.04.2013

Economic growth and Europe’s debt crisis are radically changing banking M&A

Research from PwC has found that recent years’ decline in banking M&A is not simply due to a cyclical downturn but represents a radically changed economic and regulatory environment.

The sovereign debt crisis in Europe will continue to affect banking M&A for as long as it continues. The political and economic uncertainty emanating from the eurozone is making it harder to predict future impairments, agree on valuations, arrange funding and gain shareholder approval. The crisis is also having a significant impact on deal confidence, and thus frustrating M&A.

The picture is less gloomy in the USA but some banking institutions still have significant restructuring ahead of them. Those in stronger financial shape are well placed to expand overseas. Asia-Pacific and Latin America will be the most attractive regions for outbound M&A, as the growth in middle income consumers and the rapidly expanding corporate sector demands more services.

High growth economies are now homes to some of the world's largest and increasingly influential banks. A far broader range of institutions are initiating transactions than in the years leading up to the financial crisis. Increasingly, banks from high growth economies are becoming more active acquirers, both in their home markets and abroad, and are establishing their own approaches including partnerships and distribution agreements.

Nick Page, transaction services partner at PwC, said: 

“The total number and value of global banking M&A transactions has declined steadily over the past few years. Banking deals have consistently accounted for the majority of financial services M&A over the past decade. The decline in banking M&A over the past three years – or, excluding government-led deals, over the past five years – is not just a cyclical downturn, there are permanent changes taking place.

Russia

Russia has generated increasing banking M&A over the past few years, and this growth is likely to continue. Russia has nearly 1,000 banks but consolidation, although long anticipated, has yet to really take off. The key area of focus for some innovative and fast-growing retail banks is how to access sufficient capital to support their growth. The continuing withdrawal of some Western European banks is also likely to stimulate deals. Meanwhile the largest Russian banks will continue to use M&A to develop greater scale.

Asia-Pacific

Supported by rapid economic expansion, increasing middle-class demand for banking products and a growing high-net-worth segment, Asia-Pacific is likely to remain the most active region for banking M&A. Domestic deals will continue to drive M&A, as banks respond to increasing competition and the need for greater operational and capital efficiency.

North America

The US looks poised to experience a fresh wave of consolidation among small and mid-sized banks. The American banking market remains comparatively fragmented, and the effects of regulatory changes will spur many institutions to seek merger partners. The Durbin Amendment and Dodd-Frank Act in particular will add to the costs of compliance and encourage small banks to strengthen their capital and seek greater scale. Cleaner balance sheets are also helping to stabilise valuations and stimulate transactions.

Canada

Canada’s large commercial banks, on the other hand, have emerged strongly from the financial crisis and are actively acquiring businesses and portfolios at home and in the US. These bolt-on transactions may not be large by global standards, but they have the potential to make a significant impact on bidders’ businesses. Like their US counterparts, Canadian banks looking further afield for growth are more interested in Latin America or Asia-Pacific than the troubled European market. 

Conversely, several large Chinese banks have recently set up Canadian operations, following large corporate clients moving into Canada’s resource sector. Others could follow, using M&A to establish a presence more quickly than through a greenfield approach, but Canada’s concentrated banking market offers few material acquisition targets.

Latin America

Brazil remains Latin America’s most important banking market, and will continue to generate M&A deals. National regulators are encouraging small banks to consolidate, improving capital ratios and boosting industry efficiency. Meanwhile, the larger, well-capitalised Brazilian banks are keen to follow their multinational clients by expanding across the region. So far, they have limited themselves to comparatively small acquisitions, but this is likely to change as Brazil’s economy grows. The same desire to follow trade flows is encouraging large Brazilian banks to open offices in Asia-Pacific and the Middle East. Cross-border Brazilian banking transactions will continue, but acquirers are likely to maintain their focus on niche activities.

Western Europe

Restructuring will remain the most important driver of banking M&A in Western Europe over the next few years, as banks seek to focus on core businesses and exit peripheral activities. Despite a backlog of potential disposals, market volatility and uncertainty over banks’ potential credit losses mean that buyers and sellers may continue to struggle to agree on valuations.

Finding buyer  for non-core businesses will also remain challenging. Many European banks are effectively barred from acquisitions by capital restrictions and investor scepticism. Nor are many banks from outside Western Europe attracted to invest in the region. Even so, there may be interest from some Asian players in distressed European targets that offer the chance to build a niche presence or acquire useful skills and expertise.

 

Middle East

High oil prices and the associated flow of money through the economy have helped banks in some parts of the Middle East to maintain high levels of liquidity. By contrast Dubai, in particular, has been working through the overhang of its real estate boom. These contrasting pictures and a focus on domestic and regional investment have influenced recent banking M&A in the region. Middle Eastern banks' appetite for outbound M&A has been selective; there is continued interest in nearby growth markets such as Turkey, as well as European private banking assets and the growing role of Islamic Banking in Central Asia and the Far East.   The market changes in the Middle East have created some opportunity however for more liquid institutions.

Poland

Poland continues to defy the economic gloom of many of its neighbours, generating steady credit growth. The market offers a number of investment opportunities and will remain one of the more active areas of banking M&A in Central Europe. Several banks currently owned by foreign players are reportedly in need of fresh capital, and some private owners of local banks could be interested in co-investors or a possible exit.

Turkey

Turkey offers huge potential for economic growth and higher banking penetration. In recent years Turkish banks have attracted bids from the US, Western Europe, Russia and the Middle East, and they will continue to be popular targets for inbound M&A. Opportunities to make large acquisitions in Turkey are comparatively rare, so competition for any local subsidiaries coming up for sale may be fierce.

Africa

Africa has the potential to generate increasing volumes of banking M&A over the next few years. Favourable demographics and a central role in trade between SAAAME countries (South America, Africa, Asia and the Middle East) are encouraging local and international players to increase their exposure to African banking. Further attractions include low levels of banking penetration, African banks’ strong levels of deposit funding and the scope for buyers to improve targets’ operational efficiency. In short, the case for investment in African banking is growing.

South African banks are among those looking to other African markets for future growth, and the country remains the leading gateway into Africa for foreign entrants. Most major domestic banks already have international strategic or equity partners, but there is still potential for inbound M&A. South Africa’s major banks’ earnings growth and returns on equity compare favourably with those of global peers.

Nigeria is another market that offers growing potential for M&A activity. The banking sector has gone through several rounds of restructuring, most recently in response to regulatory reforms and government intervention aimed at raising capital levels and strengthening balance sheets. There remains scope for domestic consolidation and for international players to acquire businesses in the market. Other African markets such as Kenya have similar potential for banking consolidation and rationalisation, in addition to their attractive growth prospects.


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