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Trend 4: Western Europe

Trend 4: Western Europe

Consolidation pressures to continue

Much recent consolidation has been in small bank segments, particularly in countries with many small cooperative banks, like Germany and Italy. In Italy, the largest banks have almost completed restructuring/reorganization and are ready to speed up consolidation in 2019. Those Italian cooperative banks that are based on a mutual model are either moving towards creating a banking group or alternative schemes based on mutual protection, which should further strengthen the sector. Smaller ‘popolari’ banks in Italy are also currently analyzing potential combination projects. There is a general, continued consolidation trend in the German cooperative and savings banking sector, which continued in the last few years, such as the merger of DZ Bank and WGZ Bank. We expect this trend to accelerate in other geographies such as Switzerland, Spain and Luxembourg. Swiss private banking has recently seen a number of mergers among small to medium-sized players, while foreign investors are keen to set up new private banks or acquire existing Swiss entities. The M&A activity in the Luxembourg financial sector is sharply on the rise, especially in private banking, life insurance, trust and third‑party management companies, and is at the 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. In Spain, we expect further consolidation with M&A banking activity in the mid-market segment, based on the sustained low interest rate environment and the recapitalization of the sector. 

Boom in payments fuels rush of deals

Despite the payments infrastructure experiencing considerable consolidation aimed at building global scale, with a number of transactions including IPOs, there is still a huge amount to go for. With PSD2 and GDPR now in effect, payment services provided through third-party vendors should increase ten-fold, paving the way for further consolidation and investment opportunities. In countries like the UK, France and Spain, we expect an increase in payments M&A activity. Expect consolidation and alliances in electronic, other non-cash payments and fintech companies, with a progressive increase in transaction tickets. Moreover, the industry continues to lure global investors, specifically buyout funds, which are eyeing potential acquisitions of payment companies/units of banks, especially in France and Spain, creating opportunities for higher valuations. 

Specialty finance deals on rise

Specialty finance for SMEs and consumers presents a huge growth opportunity, as European banks step back from riskier SME lending, creating openings for challenger banks, crowdfunders and peer-to-peer lenders. The UK specialty finance market has been subject to extensive regulation in recent years such as credit card fees, interest rate caps on subprime lending and rules in relation to payday lending. The sector remains dynamic with external investment but is partially subdued by the uncertain economic outlook.  

Country perspectives

 "Although credit conditions are benign, pricing headwinds from intense competition are squeezing margins, reducing valuations and driving consolidation particularly in the challenger bank tier (e.g. CYBG and Virgin Money, Aldermore and OneSavings Bank & Charter Court Financial Services). The large banks are delivering strong profitability in their retail and commercial operations. Meanwhile the market as a whole is waiting for Brexit in whatever form that takes.” - Jeremy Welch, Partner, Deal Advisory Financial Services, KPMG in UK.

"A positive market driven by focus on core geographies and activities."
- Raphael Jacquemard, Partner, Deal Advisory Financial Services, KPMG in France.

"Profitability in the Spanish banking sector has never fully recovered from the financial crisis 10 years ago, continuing to drag out the full recovery in M&A activity. On the other hand, banking-related PE activity is growing rapidly."
 - Miguel Angel Martin Aguado, Partner, Deal Advisory Financial Services, KPMG in Spain

"Swiss Private Banking M&A is set to kick into high gear, with the negative impacts from regulatory and tax compliance implementation well in the past."
- Christian Hintermann, Partner, Deal Advisory Financial Services, KPMG in Switzerland.

"Most Italian banks have implemented strategies to move from “physical” to “digital” and position themselves as platforms to connect end-customers with digital service providers (e.g., payments), while owning the customer relationship."
- Silvano Lenoci, Partner, Deal Advisory Financial Services, KPMG in Italy.

"Most large banks in Europe trade at a significant discount to their book value. This ought to make them attractive acquisition targets, but the sector has not witnessed a ‘mega merger’ for some time as most banks have focused on their own imperatives of raising CET1 (or MREL) and implementing digitization. At some point, the tide must break. The widespread speculation on a Deutsche Bank — Commerzbank merger is a very interesting development." 
- Marcus Evans, Partner, Deal Advisory Financial Services KPMG in UK.

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