The year ahead
Throughout 2020, the ramifications of COVID-19 continued to increase, cascading from Asia to various parts of Europe and then to the rest of the world. In response, most developed economies enforced temporary population lockdowns to stem the public health crisis.
While the full impact is yet to be determined, it’s expected that the adverse impact to business confidence and valuations is likely to continue from the virus’ knock-on effects. This includes the possibility of an unexpected global recession in the most advanced economies. Stock markets have experienced massive volatility, reaching 2015 levels in mid-March 2020 with central banks worldwide injecting liquidity to shore up money markets — an unprecedent scenario — with the largest global real economies in complete lockdowns, unable to resume production activities.
With poorer valuations, liquidity shocks, and a new incoming wave of non-performing loans and related provisions worsening capital strength of the banking sector, M&A activity has undergone a slowdown in H1 2020. This will likely further accelerate the global domestic consolidation trend in late 2020 and beyond.
In 2019, a modest increase of 3.7 percent1 in the number of M&A transactions took place. Deal value, however, leapt by 71 percent1 due to three U.S. mega-deals in the payments space — each greater than 25 billion US dollars (USD). The addition of two high-value ‘mergers of equals’ (also in the US) resulted in the best year, value-wise, since 2009. Domestic banking deals continued to dominate, making up for the 75 percent1 of overall activity, with the U.S., India, China, Italy and the U.K. being the most active markets.
China’s deal volume dipped significantly by 24 percent1, while India and the U.K. witnessed a marginal decline of 3.3 percent1 and 6.2 percent1, respectively. China’s banking sector faced challenges from mounting debt levels after years of growth, technology disruption, changing capital requirements, and new regulations. Despite this, further M&A opportunities are expected in the second half of the year.
Falling economic activity has muted M&A performance in India, with distress being a key driver for M&A. However, if we look ahead, it is expected that deals could surge with more mergers and divestments in pure-play banking, and consolidation among non-banking financial institutions.
COVID-19 is straining the financial markets and the global banking sector. Banks, at this stage, play a crucial role in maintaining a healthy credit system. They are called to guarantee the necessary liquidity to the real economy, also conveying trust and reliability to end-customers towards a path of recovery.
Banking institutions are faced with a series of operational issues, including exceptional losses due mainly to high loan impairments, credit origination and risk management, digital customer relationships and agile commercial models, the drive for operational efficiency and business continuity management as well as funding and liquidity.
2020 might prove to be a mixed year for banking deals in the Asia-Pacific region (ASPAC), with certain markets showing continued inbound interest in ASEAN countries, as banks look to strengthen their capital base to support lending activities. Potential headwinds relating to COVID-19 may, however, play a part in loss of business confidence alongside the potential for an increase in non-performing loans (NPLs).
In Europe, the outlook is mixed. Institutions which were under pressure prior to COVID-19 may turn to M&A for help; however a broader drop in confidence may depress deal volumes in the short-to-medium term. In the U.K., the continued uncertainty relating to Brexit ― with the transition period from the E.U. due to end on 31 December 2020 ― will add a further layer of complexity. In Italy, while NPLs have declined, profitability is far from strong; mid-sized banks are now struggling to cope with the aftermath of COVID-19. Conversely, in Central & Eastern Europe, reputable players with a non-strategic position planning an exit may have to temporarily halt their plans. After a stellar year in 2019, the volume of U.S. deals is likely to drop due to COVID-19, flat interest rates and impending election uncertainty. Finally, while banks and PE firms in Latin American economies are still well capitalized and are looking for M&A opportunities, the timing of these transactions remains unclear.
What could drive deals
COVID-19 will likely shrink overall investment levels however, fintech is expected to witness large M&A deals as incumbents and investors recognize the need to accelerate the digital transformation agenda. Although a delay in the approval process is expected, a softening attitude by regulators toward banking transactions might become another powerful driver. Loan portfolios or NPL resolution/disposals could remain strong in selected markets like Chile, China, India, Ireland and Italy. Lastly, private equity (PE) players, who enjoy healthy liquidity, are likely to first assess their portfolio companies and then seek targets — although regulatory constraints prevent them from making inroads into certain markets.
Explore deal drivers for H2 2020.
1 Data provided by ThomsonOne