The M&A activity in the Luxembourg banking sector is sharply on the rise, brought on by a confluence of two factors: consolidation of smaller subscale players into larger Luxembourg-based institutions and new entrants seeking to scale up platforms to access the EU markets.
The Luxembourg banking market has seen over 20 transactions in the past five years. The size of these deals varies, along with the origin of buyers and sellers. The transactions were almost exclusively cross-border. In particular, we have witnessed several Nordic exits since the start of 2018, preceded by some high-profile German disposals by the end of 2017. The buyers often originated from Switzerland — four cases in 2017–2018 — and non-EU countries — five cases in 2017–2018.
For buyers, it was an opportunity to tap into new clients, markets and demographics to build scale and diversify while boosting their profitability. For sellers, it represented an opportunity to dispose of non-core assets and services to achieve more efficient use and allocation of capital.
Banks of all kinds are turning to technological advancements to help keep raising costs at bay. One solution for private banks is to implement more robo-advice for their affluent client segments.
In the past 24 months, the banking transaction market has been particularly active. The largest transaction was the Legend Holdings acquisition of 89.9% of Banque Internationale à Luxembourg S.A. from Precision Capital, implying a €1.65 billion equity value. It continued the footprint expansion of Chinese banks, which are now thirteen in total, the country’s third largest.
Amid Brexit talk and developments, other non-EU banks have also opened or scaled up Luxembourg operations as a hub to access the EU market.
Swiss banks have been noticeably lively, with UBP acquiring Banque Carnegie Luxembourg S.A. in mid-2018 and UBS buying Nordea’s private banking business earlier that year. Swissquote Bank and Safra Sarasin also secured interesting assets in Internaxx Bank and Banque Hapoalim respectively.
Other recent transactions have been purely strategy-driven, for example when ABN AMRO sold its Luxembourgish wealth management and insurance activities to BGL BNP Paribas in early 2018. The Nordic banks also claimed core-market refocusing when they disposed of their assets with Skandinaviska Enskilda Banken, Catella and Ohman, to name a few.
And it’s not just about the banks. We have also seen ownership change hands in several payment institutions and fintechs over the last 24 months. These include among others ONPEX, WEEL, Etix, Catella`s card issuing operations, Digicash Payments and PayCash Europe.
Profitability, as well as the critical scale needed to operate in Luxembourg, will remain essential transaction factors. Banks will continue to be asked about profitability by shareholders, regulators and the financial market generally. For example, private banks are quizzed due to the following factors delivering lower margins:
These factors fuel the sector’s need to consolidate, maintain and grow in profitability through improved scale and synergy while accessing new client segments, geographies and demographics.
Banks of all kinds are turning to technological advancements to help keep raising costs at bay. One solution for private banks is to implement more robo-advice for their affluent client segments. Acquiring fintechs is also a popular way to catch up with the digital agenda rather than developing capabilities internally.
Likewise, banks that serve the fund industry are growing dependent on technological and lean processes to stay competitive in this passive investment/low-fee world.
PSD2 is blowing the doors wide open for venture capitals, private equities and incumbent banking participants to snap up payment operators and related fintechs.
The negative interest rate environment and continued regulatory pressure, including Basel IV, IFRS 9, GDPR, and MiFID II, have also squeezed banks’ financial positions. Because of this, transactional activities are often considered as a possible remedy.
Luxembourg is well known for its stable political framework as well as business-conscious regulatory and fiscal policies for its financial sector. Along with its EU passporting capabilities and its triple-A ratings from S&P, Moody’s, and Fitch, these factors continue to persuade board and corporate development teams to establish new or expand existing operations in Luxembourg. Therefore, there are many reasons to believe that the recent rise in banking M&A activity will not abate anytime soon.