During 1H20, banking deal activity saw a year-over-year decline in both deal volume and value by 11.5 percent and 44.2 percent, respectively, due to the impact of COVID-19. Though deal activity remained subdued overall, the US (#250), India (#67), China (#50), Italy (#30) and UK (#30) remained attractive target markets. COVID-19 generated significant instability and high volatility in global capital markets resulting in poor valuations, liquidity shocks, rising NPLs and related provisions which worsened capital strength and adversely impacted the banking transaction pipeline.
In the Americas, particularly in the US, deal activity fell to its lowest levels since the Great Recession. The year started off strongly with the proposed acquisition of E*TRADE Financial Corp. by Morgan Stanley for US$13.1bn – even as big ticket deals were called off with banks shifting focus from M&A to credit quality issues and operations. The FED imposed new restrictions after poor annual stress testing results for several banks requiring some to suspend share buybacks, cap dividend payments and adding to ongoing industry scrutiny. Though M&A activity in the banking sector remained subdued in 1H20, the outlook remains uncertain. In LATAM, deal count dried up by 30 percent in 1H20; valuation revisions for existing deals are expected to continue.
In the EMEA region, deal volume dipped by 17.2 percent while value increased by 137.4 percent mainly due to few highvalue transactions seen in 1H20. The region saw one large value (> US$15 bn) domestic deal — the proposed acquisition of Samba Financial Group by National Commercial Bank for US$15.6 bn (Saudi Arabia). There was one large cross-border transaction involving the proposed acquisition of Ahli United Bank BSC (Bahrain) by Kuwait Finance House (Kuwait) for US$9.8 bn while deal activity remained subdued in major economies like the UK, Germany, Italy and France. In Spain, a wave of consolidation in the banking industry is expected with the EUR 8.3bn merger between Caixa and Bankia, resulting in the largest bank in the country — kicking off the process.
In ASPAC, deal activity was resilient both in terms of value (up by 11.5 percent) and volume (up by 2.3 percent). India has become the busiest market for M&A in Asia followed by China. Distress was a key driver for M&A in India along with confidence capital raise in banks, distressed sale of weaker non-banking finance companies and strategic investments by PE in weaker banks. In China, the local banks continued to look at strengthening their capital position via IPOs as well as attracting new investors through direct investments.
Lastly, the payments sector did not see any high value deals (>US$10 bn) during the period. B2B transactions in the payments space kept deal activity buoyant. In 1H20, investors in the payments space focused on late-stage companies, a trend that reflected investment patterns more broadly given the uncertainty related to COVID-19. M&A activity could see a surge in 2H20 as investors or companies that have built up their cash reserves hunt for bargains.
One large cross-border deal and one large domestic transaction (>US$10 bn) were among the top 5 deals in the core banking sector in 1H20.
For international transactions, the US remains active especially in the ASPAC and Western Europe regions. At the regional level, ASPAC remains a hotspot with active bidders from S.E. Asia and Hong Kong SAR.
About 66 percent of total potential assets relate to the banking sector, making it the most attractive sector compared to insurance and IM in terms of availability of potential assets. Banking services and retail/commercial banking assets comprise of the major proportion among the sub-sector mix (47 percent). Compared to 1H19, we see an uptick in number of assets in leasing and finance, and loan portfolio sub-sectors.
At regional level, Rest of Europe, Western Europe, and Asia Pacific regions still boast the highest concentration of available assets. In the Rest of Europe, banking services, retail banking and corporate banking remain most prominent, while assets pertaining to leasing and finance are largely available in Asia Pacific. Furthermore, Western Europe may see a spike in the sale of loan portfolio assets. Countries with maximum assets available are the US, Italy, Australia, and Indonesia. For more information on fintech, see the Pulse of Fintech 1H20 report.
P/NAV multiple for major global banks (basis asset size) fell from average 0.86x in Jan’20 to 0.65x in Jun’ 20. At the regional level, North American banks traded at P/NAV equal to an average 1.33x, while Asian and European banks traded at deep discount levels of 0.44x and 0.49x respectively, in Jun’20.