Cross-border mergers in banking not fashionable
The number of global mergers and acquisitions (M&A) in banking has constantly declined over the past few years. A study by PwC has found that this trend is not only due to a cyclical downturn but that there is more to it than meets the eye.
The year 2007 represented the end of the bull market for banking M&A; since then, there have been fewer occasions to celebrate. And this downward trend hasn’t stopped ever since. According to PwC’s study Brave new world: New frontiers in banking M&A, during the first ten months of 2012, the total value of completed global banking deals fell by 37% on a like-for-like basis, compared with a 20% decline for all-sector global M&A.
Grégoire Huret, Corporate Finance partner at PwC Luxembourg, underlines that this trend is not just a cyclical downturn. He comments on the radically changed economic and regulatory environment: “Regulatory reforms, fiscal pressure as well as the Eurozone crisis are driving banking M&A. This has definitely created opportunities. The other side of the coin is that some banks have had to restructure and sell parts of their business to keep up. Historically, banking M&A was driven by industry players who were looking for growth, new markets and new products. These remain strategic objectives but other goals such as strengthening their balance sheets simplifying models and offsetting falling profitability have emerged”.
Mr Huret adds that new forms of deleveraging have emerged: “Banks are seeking to sell loan portfolios to investment funds or private equity to be able to create new business on their balance sheets or strengthen their solvency.” Cross-border European financial takeovers are unlikely to pick up in the next 18 months as regulatory changes make it harder for banks to allocate capital and create conditions in which tough market conditions persist. This conclusion in an article published by Bloomberg in November 2012 is confirmed by the findings of the PwC study.
According to PwC’s study, regulatory change is adding to the uncertainty hanging over the banking industry. In times of crisis, a return to domestic solutions are common, with regulators and governments supporting weakened local banks. “Today, regulators are encouraging domestic solutions whereas the trend moved towards cross-border mergers a few years ago. With this in mind, banks can concentrate on their local market which includes domestic clients and products”.
It is an open secret that the sovereign debt crisis will continue to affect banking M&A for as long as it continues. There is light at the end of the tunnel, however. The picture looks a bit better in the US when it comes to banking M&A; transactions have picked up there. The US industry is also digesting all the regulatory issues, but the US banking industry – like the one in Europe – is fragmented and needs to consolidate.
Like it or not, but the shift of economic power away from the economies of North America and the US has consequences in the M&A business too. According to PwC’s study, Asia-Pacific is the most active region in the world when it comes to banking M&A. Furthermore, local players in financial centres like Hong Kong and Singapore focus on banks in their region for cultural and geographic reasons. In accordance with the study there are no reasons for this trend to change in the near future. “Intra-regional deals are already a feature of Asia- Pacific banking and this is only likely to grow”.
However, Mr Huret adds that “the largest Chinese banks are already following clients around the world, using M&A as well as green field start-ups to enter new markets. Some Chinese banks have increasingly set up in Europe and in particular in Luxembourg which strategic location at the heart of Europe continues to attract investors.” In the future, change will probably be the only constant in the banking sector and in banking M&A patterns are likely to become more complex and less predictable.
In addition to that, new players have entered the arena. Sovereign wealth funds and private equity have already stretched out their feelers. The first category mentioned has been an important participant since the middle of the last decade. Most hope to realise gains, of course, but while some focus on long-term engagements others are in it for quick opportunities.
There is also a trend of private equity players showing interest in the financial sector, Mr Huret says: “Some banks have already been taken over by private equity funds though this is a minority”. PwC study mentions that “this will change over time as regulators become more comfortable with private equity ownership”.
In that context, it is also important to know how clients will react when their bank takes over another bank or is acquired. The solidity and predictability of a financial institution are crucial factors for clients when they think about where to open an account or whom to trust. Twenty years ago the situation might not have been better than now, but solidity and stability have not been questioned that much. CW