In 2021, we anticipate several signs of hope, but challenges will remain. As economies re-open, vaccines are rolled out and risk appetite returns, we expect deal activity to slowly gain momentum with certain underlying drivers in place. Below, is a summary of these themes or changes that will play out in 2021:
1. European banks are losing fire power against their American and Asian peers — a significant gap in size relative to market capitalization of top banks remains for European lenders. Pressures continue banks’ profitability driven by relentless weight on net interest income, slow progress in fee-building capacity and higher cost-efficiency ratio, consequently, downgrading the valuations of European lenders well below book value.
2. Few larger-scale domestic deals are circulating in 2H2020. The drive to consolidate, from a supervisory perspective will remedy some industry challenges. In-market M&A, particularly among mid-size banks, may benefit from significant badwill. In 2021, completion of on-going deals is expected, and more bank mergers may occur in over-banked markets.
3. Cross-border transactions and mergers in Europe may still take time to accelerate, hindered by difficulty in identifying synergies, smoothing structural impediments, regulatory constraints and accounting headwind.
4. Apart from industry consolidation, we identify six major themes/deal drivers that have the potential to ignite investor appetite and keep global banking deals buoyant in 2021. These include:
- Digital engagements — digitally engaged clients could limit the value of branches
- Low profitability — organic capital generation is too low
- Liquidity surplus — deposits and credit on divergent paths challenging earnings
- Sustainable finance — towards portfolio transitioning
- Asset Quality — more defaults to materialize in 2021
- Regulations — M&A under consideration
5. The outlook for banking deal activity remains optimistic for 2021. Fifty-eight percent of key markets expect deal volume to increase while 42 percent expect stable deal activity compared to 20201.