KPMG International’s Global Deal Advisory FS Asset Atlas presents a broad-ranging picture of deal activity and future opportunities across the financial services sector, including non-performing loans (NPLs), private equity and fintech. It is a must-read for key M&A decision-makers in Corporate Development and other specialist M&A functions. You are invited to view highlights of the global financial services, banking, insurance and asset management trends in 2019 and opportunities for 2020-21. Please contact us for more information about assets and opportunities in your market.
Early look at the 2020 FS deal landscape
Since the start of 2020, ramifications of COVID-19 have continued to emerge. A halt in productive activities world-wide has produced spill-over effects into every area of the economy. As a result, the global economy is projected1 to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis.
We have already seen its impact in the global M&A market in the first quarter of 2020, despite the fact that lockdowns were only implemented part way through the quarter. Global deal activity in the financial services sector is down dramatically by 16 percent in volume compared to the same quarter in 2019. In general, deals that were close to signing or execution were moved forward and completed while those in initial phase or near to launch have been delayed until the summer.
Looking forward, it is hard to decipher how the M&A market may evolve in the short term. However, certain trends can be expected: increased transactions involving rescue deals, restructurings, and distressed portfolios and banking non-performing deals. There may be a great desire to improve balance sheets and pursue deals that seek to create long-term strategic value for financial institutions.
On the other side, stock market volatility across the first and second quarter of 2020, turmoil in capital markets and the real economy, and possible declines in asset prices will remain. With these unprecedented headwinds in the deal landscape, we believe that the trends that emerged over the past cycle will remain important to foresee potential opportunities in the longer term.
2020 FS deal opportunities
In 2020, we expect business confidence and valuations to be significantly affected by COVID-19 , with broad expectations for a global recession. Stock markets experienced massive volatility, reaching 2015 levels in mid-March 2020. Central banks worldwide have injected massive liquidity to help shore up money markets — an unprecedented scenario as the largest global economies suffer from the wide-ranging lockdowns. With poorer valuations at this stage, liquidity shocks, and new incoming wave of non-performing loans, we expect M&A activity to suffer a slowdown in the first half of 2020 as institutions focus on reacting. But with the transition into recovery, we are likely to see an acceleration of the global domestic consolidation trend in late 2020 and 2021.
Banking deal opportunities
UK: consolidation in the middle-tier banks, stress in the non-bank commercial and consumer lending sector and opportunities for well capitalized fintechs to take advantage of the rise of digital, particularly enabling technologies (e.g. AML/KYC anti-money laundering/Know your customer)
Germany: distressed situations could force existing shareholders to mergers or dispose financial assets despite lower prices; on the buy side, interest from financial sponsors is increasing for asset-light financial service businesses but also for initial distressed situations
Italy: domestic bank consolidation partially challenged by the health crisis; PE eyeing specialty finance sectors, fund intermediaries and private banking; ongoing consolidation of NPL servicers also in light of an additional wave of NPLs following COVID-19
Spain: PE targeting aggregators, fund intermediaries, private banking and bank business process outsourcing (BPOs); banks focus on sale of granular secured NPLs, residential rented assets, young corporate NPLs. More opportunistic approach to larger targets
Luxembourg: banking groups owning private bank subsidiaries whose assets under management fall below critical mass are accelerating their exit; private banks refocusing their own businesses to serve high/ultra-high net worth individuals — a restructuring of traditional relationship management models
Australia: divestment of non-core businesses (i.e. wealth management, financial advice and insurance) by major banks
China: state takeovers of troubled banks; restructuring by smaller regional banks; financial institutions group (FIGs) investing heavily in fintech; retail technology providers keen to enter small and medium sized enterprises commercial banking space; banks selling NPLs to asset management companies (AMCs)
Japan: outbound investments to continue, mainly into Asian banks and non-banks; consolidation moves to widen in medium term
Indonesia: domestic banking consolidation remains key. In-country transactions dominate the deal landscape due to large number of smaller regional banks
India: policy and regulatory changes to open restructuring opportunities; mergers of weaker banks and small finance banks (SFBs) into universal banks; divestment of non-core assets by banks (especially their stakes in insurance companies); distressed sales of weaker non-banking finance companies (NBFCs)
ASEAN: divestment of non-core insurance businesses from banks; growth capital for banks and NBFIs; banks selling NPLs to credit funds and AMCs
US: consolidation of middle-market banks (Merger of Equals); payment fintechs to merge with each other
Canada: banks to focus on wealth management, expanding presence in non-Canadian markets and divestitures of non-core activities; PE may be active in divestitures of non-regulated businesses (payments processing, etc.)
Argentina: fintech partnerships to build payment processing, mobile wallet capabilities and some M&A activity for liquidation and compensation
Brazil: international banks target asset management, investment banking and high net worth (HNW) focused products — the impact of COVID-19 still remains unclear
Chile: NPL market active as increase in default loans expected, especially in retail
LATAM: PE targeting fintechs, particularly transaction processing, payments processing, and electronic bill pay
Insurance deal opportunities
UK: consolidation of the reinsurance sector; insurtech startups seen as acquisitive targets; increased focus of PE, sovereign funds, pension funds on insurance market
Italy: renewal of certain bancassurance agreements is expected with potential sale of older life insurance back-books; insurtech to grow — M&A activity limited to few sizeable available targets available for sale
Spain: PE has a strong focus on distribution and BPOs for financial sector (banking and insurance); insurance players seen as potential buyers for asset management firms; sale of life saving portfolio as run-off is seen as mid-term trend
US: ongoing consolidation of middle-market insurance companies; PE invest in long-term care insurance and insurance brokerage
Canada: insurance distribution, intermediaries, and start-ups seen as attractive segments; life insurers target niche insurance businesses and wealth management
LATAM: PE firms show active interest in representations and warranties insurance
Brazil: international insurance players are targeting deal opportunities to expand market share and complement portfolio
China: foreign financial companies (from France, Hong Kong (SAR), China etc.) targeting local pension businesses
Indonesia: market is still attractive for foreign investors, can own up to 80 percent of a local insurance group, despite many investors are still in a “wait and see” position due to the impact of Covid-19; the insurtech agenda has become a top priority
Singapore: insurers to re-think their current business models including expansion into new markets or exiting parts of the business that no longer align to the new business model; insurers to increase investment in their digital reach, while insurtech companies seek to raise new funds to support future growth strategies
Thailand: consolidation activity is expected to be a key M&A driver in both life and non-life segments of the market
ASEAN: regional and global insurance companies target SE Asian countries for expansion (e.g. Indonesia, Vietnam, Thailand) but limited by foreign direct investments limits; insurtech companies look for fundraising; sovereign and PE target insurance brokerage; Japanese life insurers remain active bidders; platform businesses bolt on insurtech and new product capability
Asset management deal opportunities
UK: PE funds acquiring wealth managers to tap into the sector's consolidation; asset management diversifying into areas like private markets, tech, etc.
Italy: sector concentrated by small-medium asset managers — financial groups and PE show interest; asset managers target tech companies offering RegTech, robo-advisory, etc.
France: large French asset managers, subsidiaries of global banking players, look to expand globally especially through distribution agreements with local banking partners; mid-size and small French asset managers are facing Mifid2 impacts and lack critical size, which might trigger a new wave of consolidation as well as recurring financial sponsors’ interest
China, Mainland/Hong Kong (SAR): Chinese fintech companies likely to focus on wealth management segment; private banks eyeing wealth management
Singapore: consolidation of smaller asset management companies; new capital for emerging fintech players and regional expansion into ASEAN
India: sale of small / midsized AMCs which are non-core businesses to some of the banks / NBFCs / sponsors; fund raise / secondary transactions in specialized wealth management platforms; consolidation between small-midsized fintech providers in wealth management
Fragmented industry, high level consolidation likely to occur, particularly among traditional fund managers
Wealth management firms eyeing technology companies to acquire new capabilities such as data analytics, portfolio rebalancing solutions and machine learning capabilities
The outlook of volatility in global markets in 2020 has created an enormous interest in fixed income ETFs; investors are also interested in technology ETFs, mainly in the areas of internet, robotics, AI etc.
US: asset managers target insurance companies to boost assets under management AUMs; rapid consolidation in the RIA industry, PE firms seen as active bidders; wealth management sector also sees consolidation
Canada: asset and wealth management companies seek to increase product offerings and asset base through M&A; wealth management companies targeted by big banks
Head of Financial Services
KPMG in Saudi Arabia