Country banking M&A insights

In 2021, the regulatory simplification program driving divestment of banks’ non-core financial services offerings such as fund management, financial planning, insurance and asset lending is expected to continue. Moreover, deals in pursuit of digital channels including fintech capability is another deal catalyst to watch. Opportunities remain for private equity and other foreign investors to position in the Australian market. Overall, we should see a continued robust transaction market for non-core banking operations over the next 12 months.

PE Interest | Likely focus to be on remaining fund management platforms, superannuation businesses and asset lending businesses.

Deal volume 2021 vs 2020 | Stable

Overall, banking opportunities have risen as banks continue looking to increase their capital and some shareholders look to exit for different reasons. New opportunities to obtain a higher strategic stake in domestic banks given underperformance with NPLs and lack of capital, are seen. Such opportunities were rare earlier, and we expect them now to drive more domestic M&A. Consolidation may take place for city commercial banks and rural commercial banks. Such NPL disposal, Debt-Equity Swap as well as Capital Injection are possible and potential transactions to be seen under this consolidation context. In coming months, China will launch the ever-first time Retail NPL disposal on those consumer finance (credit cards) and unsecured personal loans. This Retail NPL will be on the primary market (Chinese Banks to Asset Management Company) without the involvement of secondary market in this pilot trial. Opening China’s financial services market will also continue to attract foreign investors. Besides direct equity investments, we expect to see strategic co-operation between Chinese banks and foreign investors, particularly around wealth management, digital banking and Fintech.

PE Interest | Traditionally, PE has not been active in banking due to regulatory reasons. We expect this to continue. However, PE is expected to remain active in other sub-sectors, such as payments, leasing and consumer finance.

Deal volume 2021 vs 2020 | Increase

Overall, Indonesia remains a popular market for foreign investment and banking M&A amid the high profitability of local banks, the large unbanked population and government efforts to consolidate the industry. From 2019, we saw an increase in foreign acquisitions following a shift in OJK to be more accommodating to foreigners, where OJK relaxed its 40-percent stake cap for new investors willing to do additional mergers after acquisitions. With COVID-19, M&A transactions in all financial sectors slowed in 2020 but are expected to pick up in the medium to longer-term (deal activity has already started returning to pre-COVID levels). OJK has also announced a mandatory increase in core capital requirements for commercial banks to IDR3 trillion by the end of December 2022. This is primarily aimed at reducing the number of small banks, which are highly vulnerable to financial stress and to create a strong banking system, expand the business scale and increase competitiveness through innovation and enhance the national economy. There is a rapid move towards cashless payments, given the quick adoption and large penetration of smartphones and growth in ecommerce. These will further drive bank and non-bank M&A for traditional lending and payments providers (bank networks, ATM networks and Fintech entrants).

PE Interest | Attractive destination for domestic and foreign PE firms. Non-performing Loans (NPL) will remain a key segment of interest.

Deal volume 2021 vs 2020 | Stable

We expect several regional bank consolidation deals, prompted by new government measures as well as inherently low profitability and growth amid ultra-low interest rates and shrinking regional economies due to population decline. The new administration that started in September 2020 continues to encourage consolidation of regional banks. There have been or will be several measures to facilitate consolidation, such as the introduction of an exception in applying antitrust legislation, subsidies for integration costs, and the application of additional interest rates on central bank deposits for merging or consolidating banks. However, many bank CEOs have expressed discomfort over the government applying consolidation pressure. In 2020, we saw several consolidation deals between leasing companies. We expect this trend to continue. Further consolidation and alliances are expected between domestic leasing companies in order to strengthen financial bases for taking more risks for growth area and/or to combine business strengths of non-financial companies and those of leasing companies. Moreover, overseas investments by banks and leasing companies (mainly in banks and non-bank financial institutions) will continue, especially in Asia.

PE Interest | PE is not expected to remain active within the sector.

Deal volume 2021 vs 2020 | Stable

Following COVID-19, banks will need to maintain their regulatory capital and other liquidity requirements. However, this will be challenging if IFRS 9 requires an increase in provisioning from an upgrade in expected losses or regulatory capital buffers change. Heightened unemployment and future cash flow risks may impact the serviceability of residential property loans, SME loans and unsecured loans across a number of sectors, particularly travel, hospitality, retail, entertainment, real estate and construction. The MAS and banks were supporting customers through the Special Financial Relief Program (SFRP) allowing deferred repayments of loans until 31 December 2020. The support measures were subsequently extended to help individuals and SMEs facing cashflow difficulties transition gradually to full loan repayments and support progressively expire during 2021.Short-to medium-term liquidity risk will need to be stress-tested amid the impact of expected delinquencies increase following the SFRP moratorium. Advancements in Fintech and digitalization have paved way for digital banks in Singapore, with MAS granting two digital full bank licences and two Digital Wholesale Bank (DWB) licences, in a first for the city-state and a highly anticipated move that aims to liberalise the financial industry.

PE Interest | PE activity in the sector will likely center on Fintech and payments opportunities, particularly given the growth of digital financial services offerings from non-banks such as technology companies, online platforms, e-wallet providers. The impacts of COVID-19 will also drive NPL activity as distressed credit opportunities emerge, underpinned by reducing government support and financial impacts of IFRS 9.

Deal volume 2021 vs 2020 | Stable

ASEAN based deals have been a key theme for Thai banks with Bangkok Bank closing an approximately USD2.9bn deal in December 2020 to acquire Permata Bank of Indonesia among other smaller regional forays by Thai banks in consumer finance and banking. Thai banks remain active in the fintech / venture space with their venture arms closing funding transactions in the areas of e-payments, logistics and customer experience technologies, among others.

The banking regulator has provided certain dispensation from the application of IFRS 9 staging, and related expected loss recognition for loans under relief programs which will continue into 2021. The expected NPL trend is a key concern for market participants and regulators. We understand that regulators are discussing with stakeholders necessary measures and interventions.

NPLs and other operational pressures may drive further consolidation within the ranks of mid-tier banks. We are also seeing increasing M&A and funding activity in Thailand’s Asset Management Company (AMC) space as local and foreign investors look to benefit from the expected increase in the supply of distressed assets, but these are very much concentrated in the areas of secured Retail and SME lending, and further significant distressed opportunities are likely to arise, particularly in the corporate sector. Thai banks remain keen on outbound deals with Vietnam often cited as a preferred destination within ASEAN.

PE Interest | PE is not generally active within the banking sector but has invested to setup AMC platforms over the past few years. The scale of NPLs will likely reopen the field to foreign PE. Fintech, technology platforms and consumer finance are expected to be other key areas of PE interest.

Deal volume 2021 vs 2020 | Increase

In 2020, transactions came to a standstill. Buyers claimed they were unable to assess the impact of COVID-19 till mid-2021 while sellers were reluctant to sell at depressed prices. In 2021, banks could evaluate the damage caused by COVID-19 on balance sheets and consider if prices are right to sell/buy. In view of credit quality, banks have provisioned themselves adequately for NPLs, however, we expect NPL sales may resume but not before the impact of COVID-19 is clear. Most players see Fintech in the region as insignificant, having caused limited disruption to date. Several banks have also developed some payment solutions in-house.

PE Interest | PE has only been active very sporadically, mainly in turnaround situations in the Balkans and in the Baltics. PE plays a part in the NPL market which is consolidating rapidly but is taking a breather now.

Deal volume 2021 vs 2020 | Stable

In 2020, Italy faced a new wave of domestic consolidation amid significant transactions, such as Intesa Sanpaolo and UBI Banca and the recently announced Credit Agricole public tender offer on a small-sized Italian bank located in Northern Italy, and other smaller transactions. In 2021, consolidation is expected to continue, mainly driven by cost optimization and NPL deleveraging. Some distressed opportunities might be at the center of potential acquisitions as well.

PE Interest | PE has not showed significant interest in the pure commercial banking sector and are more focused on NPLs, insurance and the specialty finance sector.

Deal volume 2021 vs 2020 | Increase

European banking groups continue to reassess their Luxembourg private banking subsidiaries, when AuM fall short of the current minimum profitability threshold to operate, (€10bn). Margins are under pressure from new regulations, escalating compliance costs, digitization of platforms and low interest rates. With Brexit now a reality, Europe-based payment businesses are increasingly establishing a presence in Luxembourg. Banking subsidiaries that are subscale will continue coming to market in the years to come while sector consolidation will likely continue in private banking. We expect Fintechs, Regtechs and alliances with Bigtechs to further reshape the banking landscape.

PE Interest | PE have had limited success to penetrate the Luxembourg banking market, as a result of regulatory hurdles.

Deal volume 2021 vs 2020 | Increase

In general, we saw relatively limited deal activity in 2020, certainly due to COVID-19 which caused banks to reprioritize. For 2021, it is difficult to predict the level of bank deal activity, however, we are likely to see continued interest in Fintech and platform-related opportunities. We may also see an uptick in portfolio sales, but that will depend on how the pandemic unfolds. Perceived support from the ECB for cross-border banking mergers may also driver more deal activity.

PE Interest | With the (limited) number of deals currently in the market, we continue to see strong interest from PE.

Deal volume 2021 vs 2020 | Increase

2020 was a quiet year following 2019’s, historically low activity. In the second half of the year, private banking consolidation picked up significantly with five mergers/take-overs of small/midsized private banks. We expect mergers amongst these banks to continue. Payments will see increased activity. While retail banking remains quiet, we see new digital offerings increasing market share of Neo banks, which could result in increased margin pressure in a market that is still very profitable.

PE Interest | PE interest is still rather limited but several PE firms could seek attractive investment opportunities in the private banking market.

Deal volume 2021 vs 2020 | Increase

Deal activity remained subdued until September 2020 amid COVID-19’s impact. Only larger long-term deals progressed while smaller deals were canceled or postponed. Deal activity picked up in September 2020, driven by postponed project flow and new projects starting after summer. Banking deals evolved into restructuring cases, where strategic buyers pursue badwill acquisition opportunities to increase equity positions or disposal of non-core assets. In 2021, banks will face three major challenges —low interest rates (low NII margins), higher loan loss ratios (pressure on CET1 levels) and strong disruption of distribution channels for new business production (closure of branches and poor digital distribution channels). The combination of headwinds and deal drivers is expected to accelerate deal activity as some banks may not survive this in the next 24 months.

PE Interest | PE investors are looking across the board but prefer balance sheet light investments.

Deal volume 2021 vs 2020 | Increase

COVID-19 accelerated the need for banks to consider potential mergers and enhance profitability through synergies. This led to the announcement in September 2020 of the CaixaBank and Bankia transaction and negotiations between Unicaja and Liberbank, among others. In 2021, we expect completion of transactions announced in 2020 leading to the reorganization of many alliances (insurance, servicing, consumer finance). The Spanish banking sector will finally kick-start a second long-awaited consolidation wave, addressing low sector profitability and prepare for cross-border activity. We will also see the creation of NPL portfolios that will feed the market in coming months. Additionally, smaller banks and cooperative banks continue reviewing their business models to adapt to the challenging environment regarding heightened regulatory pressure.

PE Interest | PE may be interested in specific banking niches, such as private banking, payments and SME lending. Once the NPL portfolio market recovers, specialized funds may be active again.

Deal volume 2021 vs 2020 | Increase

In 2020, COVID-19 paused the market while buyers and sellers assessed the pandemic’s impact on strategy and pricing. We saw a shake out of the P2P industry. P2P platforms – reliant on retail providers for liquidity – struggled and in many instances were forced to sell. In the consumer finance (POS) sector, we saw significant interest in providing flexible consumer credit options at the retail POS. At the end of the year it also appeared that a number of mid-tier banks would also come to market amid structural and economic pressures weighing on the sector.

Digital transformation is also quickly reshaping the commercial finance space, especially for supply chain finance and the flow of commercial data. Commercial finance services offered by banks are now fueled by technological capabilities that prioritize customer/client expectations and address the needs of small and large corporate clients. We expect a continuation of both consumer and commercial finance trends in 2021.

As we head into 2021, the focus will shift to NPLs as government stimulus measures wear off and the economic impact of COVID-19, and any additional Brexit effects, impact on consumer and corporate borrowers. It is unclear how NPLs with attached government guarantees will recover and to what extent a secondary market will emerge.

Finally, the need for a seamless digital customer journey has risen and new entrants continue to slice off profitable parts of business and customer relationships. Banks that can manage this digital revolution to the benefit of their extensive customer bases and who can generate broader fee revenues will thrive.

PE Interest | NPLs and Market infrastructure — with profits moving away from investment banks to industry platforms -the value of those platforms, and related connectivity and data providers, continues to rise.

Deal volume 2021 vs 2020 | Increase

The M&A market has not shown bank transactions for 2020 period, maintaining 2019’s inactivity. Some interest in wealth management has occurred for brokerage firms while several banks are starting to position themselves in the payments industry by establishing a venture capital arm. Banks have significant exposure to the public sector, and therefore their books are linked to the performance of Argentinean public debt. The sector has been hit hard by the Argentinean crisis, with market prices down 80 percent from 2017 highs and no clear recovery path for 2021.

PE Interest | PE that operates within the country is not active in the banking sector. The sector is not expected to become an attractive segment in 2021.

Deal volume 2021 vs 2020 | Stable

Financial services proved resilient during COVID-19 with Fintech and digital banking driving M&A both in 2019 and 2020. Open banking, payments solutions, and cash management solutions have been the main drivers. We expect deal activity in 2021 to increase with the recovery of the capital markets and investor capital flow to Fintech. Asset management will also be an opportunity for investment with some international players re-entering the market.

PE Interest | PE to remain active in Fintech, digital solutions and payments solutions.

Deal volume 2021 vs 2020 | Increase

In 2020, regulated banking institutions hit pause. Non-regulated lending (point of sale, small/medium businesses) saw a degree of activity while payments organizations were active in international acquisitions. In 2021, Canadian banks will continue to display cautious optimism, entertaining potential acquisitions with great care. We may see possible disposal of non-core activities by banks and continued merger of credit unions following challenging economic conditions, technology investments and regulatory compliance requirements. Banks will continue investing in technology, with a mix of in-house, partnership or M&A. Fintech lending operators should see more activity as the current economic conditions brought on by COVID-19 will stress individuals and SMEs that have relied on these players.

PE Interest | Continued interest in non-regulated lending and payments. Acquisition of non-core activities of banking groups.

Deal volume 2021 vs 2020 | Stable

Deal activity remained unchanged in 2019 and 2020. In 2021, transactions are expected to remain stable with activity expected in Fintech, the sale of NPLs and possible industry consolidation as weak players go out of business. The market expected a major merger between two Spanish lenders but, discussions collapsed after the banks disagreed over transaction pricing.

PE Interest | PE expected to remain active only in the purchase of NPL portfolios.

Deal volume 2021 vs 2020 | Stable

We expect 2021 to start where 2020 left off, with consolidation of regional players to creating super regional and national franchises. Subject to regulatory changes from the new administration, we expect a high volume of bank consolidation throughout the year with banks taking advantage of resulting cost savings to invest in becoming more digitally agile in order to serve the demands of a post COVID-19 customer base. Banks are looking more at their product portfolio and disposing of non-strategic and underperforming segments.

PE Interest | PE will remain active in Fintech and challenger banks but bank holding company regulations will continue to keep them largely outside of bank investing.

PE seems ready to get back into specialty finance on a limited basis, but we believe that banks will be the primary buyers in that space.

Deal volume 2021 vs 2020 | Increase* (assuming no regulatory changes from the new administration)