Banking M&A regional performance

Low valuations create buyers’ market     |     P/TBV multiple (x) of the top banks, by region     |     Regression ROTE '21 — P/TBV

The impact and severity of COVID-19 remains unclear. Immediate measures taken by regulators globally have eased restrictions on liquidity and capital, however, revisions to loan loss provisions, maintenance of capital adequacy ratio and compressed net interest margins are just some of the immediate pressures confronting banks. Consequently, bank valuations dropped globally. At a regional level, North American and ASPAC banks are still trading at P/TBV equal to an average of 1.8x respectively, while European banks are currently trading at significant discount levels with average P/TBV at 0.8x as of November 2020.

COVID-19 did create uncertainty in the deal making market whilst buyers and sellers considered the impact on strategy and pricing. Some buyers chose to focus on shoring up internal operations while others-built scale to acquire distressed portfolios, pumped up deals. Going forward, we expect private equity will lead the way. More than US$1.5 trillion in dry powder remains and surplus cash may lead to stiffer competition and higher valuations in 2021.

ASPAC banks⁵ | Looking at the ASPAC region, Indian banks hold sound valuation levels, trading at an average of 5.1x followed by Australian (1.6x) and Chinese banks (0.9x), as of November 2020. Banks in the region generally are well-capitalized. Asian banks have been preserving capital by pruning dividends or offering scrip options during COVID-19, allowing them to raise debt from yield-starved investors and further increase capital.

European banks | European banks valuations remain dampened. Looking at the Europe region, top Nordic banks (especially from Sweden, Finland) have stronger valuations (average 1.2x implied P/TBV) compared to other players in major economies like the UK, Spain, France, Italy and Germany. Capital and risk positions continue to be key rating strengths for Nordic banks.

North American banks | Top Canadian banks are trading at better P/TBV, at an average of 2.1x, compared to top US banks (average 1.7x), as of November 2020. In Canada, government relief efforts and loan deferrals by banks curbed an anticipated surge in delinquencies and impairments, with a simultaneous check on consumer-credit deterioration. Canadian banks are well capitalized, with a capital position well above regulatory requirements. The regulator has imposed a freeze on dividend increases and share buy-back programs. Going forward, however, top-line growth will remain a strong headwind, and, cost control and efficiency will play a key role in determining performance.

A strong correlation between bank valuation and profitability is envisaged by the regression analysis. North American banks register higher valuations due to higher expected profitability (ROTE equal to 12.3 percent on average, compared to 8.5 percent and 7 percent in Asian and European banks, respectively). Higher profitability can also be partially explained by the different business model, with Investment Banking predominating in the US versus Commercial Banking in the EU. European banks are showing expected profitability lower than the cost of capital with ROTE equal to 7 percent compared to a cost of equity equal to 8-10 percent on average.