Global Banking M&A Trends 1H22 | Regional outlook

France has a mature, heavily concentrated banking sector dominated by several large groups, leaving limited room for large deals. However, there are exciting opportunities in insurance brokerage, private banking, wealth and asset management, with a host of transactions in the pipeline. M&A for cross-border activity, fintechs and NPLs remains relatively quiet, the former due to regulatory restriction. Domestic banks have been reluctant to divest NPLs. Investors are getting more sensitive to ESG, and asset management funds are expected to focus on sustainable investments as drivers of future value.

PE activity:

PE houses prefer to focus on non- or lightly-regulated targets like brokerage, IFAs and payments.

M&A volume is likely to increase in 2022 with multiple mega deals, involving commercial banking, direct banking, and universal banks already prepared in 2021. Expect both cross-border and domestic deals. Regulatory changes should drive consolidation in the debt collection and leasing market.

PE activity:

PE is expected to remain active, as investors in traditional credit institutions sell portfolio holdings after successful restructuring. PE investors are also interested in tech based scalable business models, especially in traditional classic banking products with a high manual component, such as debt collection and trade finance.

Italy has been the most active market in the Eurozone, with several major transactions over the past year or so, including both domestic deals and cross-border acquisitions of Italian banks.

Consolidation continues apace - in the past few years, four of the top-ten banks have either merged or been acquired, in a bid to create greater efficiencies to address below-par profitability. Acquirers aim for at-scale cost reductions through system synergies and branch closures. Several Italian banks are forming internal `factories' - notably in bancassurance, in order to generate recurring commission revenue. In the next 1-2 years, we can expect further domestic consolidation, indicating a healthy deal market.

PE activity:

PE deal activity is expected to focus on NPLs and digital payments.

Banking consolidation in Luxembourg is an unstoppable trend since the last credit cycle and openly encouraged by banking regulators, primarily in the form of asset deals. Private banking groups set their sights on Luxembourg targets in order to serve a pan-European client base. Deal volume is likely to be stable in 2022, with domestic consolidation continuing, along with cross-border acquisitions.

PE activity:

PE firms are not expected to be particularly active in Luxembourg, being largely absent from the private banking sector.

In 2021, Spanish banks experienced consolidation as well as disposals of business lines that didn't bring competitive advantage. The sector was also characterized by partnerships by the largest banks to offer services on a global basis; reconfiguration of bancassurance agreements, as in the post mergers of banks - Bankia/Caixa; and a relaunch of the NPL market. Deal volume in 2022 is expected to remain stable, with further consolidation and rising NPL sales. New payment services and partnerships are set to grow, opening up the market to fintechs.

PE activity:

PE players should be active in NPLs, financing, leasing and factoring.

While the country experienced a very busy 2021 for financial services M&A, banking contributed less than 20 percent of deals. The main action involved consolidation in Swiss private banking, international acquisitions of large Swiss private banks, and some exits by Swiss private banks from markets with sub-scale activities. In 2022, banking deal volume is likely to be stable with further private banking consolidation and transactions from large private banks to optimize their international operations. New licensing requirements for independent asset managers should be a spur for activity, while crypto banks/businesses may also enjoy growing interest.

PE activity:

PE activity is expected to be limited.

Banking deal volume increased substantially in 2021 as the financial services sector rebounded, while digital transformation played a key role in deals. In 2022, deal activity was expected to remain buoyant, especially in domestic consolidation. However, geopolitical events, rising interest rates, and inflation has slowed the pace of assets coming to market and lengthened the time it takes to do a deal. Large domestic banks are increasingly looking to acquire new capabilities, and divest to focus on priority areas. On the mid-tier side, competitive and regulatory headwinds are driving consolidation. Closer regulation of Buy Now Pay Later may affect smaller fintech players. With many fintechs well capitalized and serving global markets, the opportunity for acquisition from large banks at highly discounted values seems distant.

PE activity:

PE will remain active across most segments, primarily in specialty finance and payments. Broad PE interest in unsecured credit may reduce to more specialist funds, with potential for higher credit losses.

Major banks shifted focus to growth in 2021, resulting in strategic acquisitions laying the ground for further consolidation. While continuing to expand, banks are likely to be cautious in 2H22, to assess the impact of inflation and rising interest rates on asset prices, security and ultimately bad debts; consequently, volumes should fall slightly. Regulatory changes, including the Australian Royal Commission and Future of Financial Advice, have increased scrutiny, added costs of compliance and customer remediation, pushed up risk levels and challenged vertically integrated businesses. When combined with rising competition from industry and tech players, banks are under pressure to divest non-core businesses such as insurance and wealth management.

PE activity:

Large global PE houses have recently acquired SME lending businesses, asset and wealth managers, payments businesses and leasing businesses, as part of bank divestments. PEs are now likely to focus on secondary asset sales, although there remains genuine pent-up demand for financial services acquisitions.

A very active banking 2021 M&A market was driven by regional consolidation of small and medium sized banks, and divestment of non-core assets in state owned NPL asset management companies. Despite macro-economic uncertainties and COVID-19 driven lockdowns, banking M&A should stay active in 2022, although not quite at 2021 levels. Some large Chinese banks seek new capital to support further growth, and certain rural and city commercial banks may consolidate to stay competitive and strengthen capital structures.

Chinese banks are required to segregate their wealth management businesses from core banking operations to reduce conflicts of interest, prompting several foreign asset managers to form JVs with Chinese banks - a trend set to continue. China has further promoted the opening of its financial services sectors to foreign investors, and foreign financial institutions are assessing their business and strategic plans in ASPAC and Greater China, which will drive more M&A activity around acquisitions, divestments, or new JVs. Chinese financial institutions are also reviewing their global strategy/footprint.

PE activity:

PE firms are not expected to be active in the banking sector in 2022, given the current regulatory environment in China.

Eight virtual banks received licenses in 2020, and most partnered with traditional banks and/or large conglomerates, but the majority are struggling to find a clear path to growth. These banks also face stiffer competition from traditional banks who have strengthened their own digital offerings, and some virtual banks may shut down or quietly cease operations, while others scale up through international expansion in ASEAN. Given digital disruption, macro-economic events and geopolitical change, domestic banking deal volumes should be relatively muted in 2022. Much of the activity is likely to be cross-border investments by Hong Kong based institutions into ASEAN markets.

PE activity:

PEs tend to focus on the `money lender' space. Relaxed regulations allow money lenders to charge up to 60 percent effective APRs, and the money lender license carries no capital requirements and relatively low regulatory hurdles.

Consolidation is a major factor driving India's banking M&A, with the government planning to divest its stake in six public sector banks, having already announced the privatization of two banks. The private banking sector has also been active, with large banks aspiring to grow, and smaller and/or distressed banks being bought. In the next couple of years this consolidation should continue. Deal volumes are set to increase in 2022, primarily due to domestic activity. Fintech payments players are a growing acquisition target, reflecting rising consumer preferences and government support.

The launch of new services and platforms, such as digital payment platform `e-RUPI' and Account Aggregator, should spur new deals. Co-lending is another emerging trend, with potential for acquisitions by banks eager to access new capabilities.

PE activity:

Given regulatory restrictions on PE ownership of banks, these investors have very limited presence in the Indian banking market. However, with the government's divestment plans, the doors may possibly open. PE players are acquiring non-banking financial companies (NBFCs), emerging fintech businesses and asset backed lenders.

The continued government's focus on consolidation among smaller regional banks resulted in several deals announced in 2021 and more following in 2022. Measures to facilitate consolidation include an exception in applying antitrust legislation, subsidies for integration costs by Deposit Insurance Corporation of Japan, and additional interest rates on central bank deposits. We also expect further deals involving domestic leasing businesses, such as consolidations, alliances and acquisitions, to strengthen the financial base, and combine non-financial and leasing capabilities. Major banks and leasing companies are acquiring bank and non-bank financial services businesses overseas, particularly in Southeast and South Asia.

PE activity:

PE is not active in the banking sector.

The year 2021 was active for banking M&A. Following a trend across ASPAC, leading South Korean banks are viewing offshore expansion as home markets become saturated. In 2021, domestic banks and PEs invested in several fintech, IT and virtual assets companies. Given a continued needs to expand overseas, diversify and digitize, expect a slight increase in Korean bank M&A in 2022 and beyond.

PE activity:

PEs may consider selling financial companies to Korean banks aiming to strengthen securities, insurance and payments. And PE houses may also seek co-investment opportunities with Korean financial groups to increase deal flow and diversify risk. Further opportunities may come from the Korean government promoting investments in fintech and non-financial companies, as well as Korean banks expanding investments in microfinance and fintech/big tech companies in Southeast Asia.

The banking and payment M&A activity was very hot during 2021 and the first half of 2022, due to a quest for new products and services, consolidation and new entrants, with many players successfully raising funds. In a disrupted market, large incumbent banks and fintechs are looking for acquisition/merger opportunities. Global and local uncertainty has slowed the market mid-year, but we expect deal activity to recover by the start of 2023, as buyers look to targets in a growing banking and payment solutions market.

PE activity:

PE houses prefer to focus on non- or lightly-regulated targets like brokerage, IFAs and payments.

Although Canadian big banks continue to look to the US for M&A targets, they still consider domestic opportunities where this is a strategic fit and realistic expectation of regulatory and competition approvals. With healthy capital positions, some are still redeploying through share buybacks and increased dividends, maintaining a prudent outlook. The domestic market continues to see some balance sheet activity, with Equitable Bank announcing the acquisition of Concentra Bank in February 2022. Fintechs are still being scrutinized for the promise of their business models. Overall, transaction activity in 2022 and beyond is likely to be strong, with both strategic buyers and investors seeking to use dry powder to pursue growth.

PE activity:

PE remains active in the Canadian payments, fintech and non-bank lending sectors, although is unlikely to expand significantly beyond these sub-sectors.

After an active 2021, characterized by multiple high-value deals, the recent increased regulatory scrutiny has been a shock to the system, slowing down activity. We will continue to see other types of deals, namely purchases of fintech to accelerate digital transformation. A further driver is continued consolidation of mid- and lower-tier and community banks to gain scale and fintech capabilities. Cross-border inbound divestments are buoyant, as overseas banks shed US assets to retrench, while some big US players have acquired unregulated European fintechs. With rising interest rates and inflation, smaller banks may struggle to remain competitive, and could become targets for bigger peers. Fintechs may also be more exposed to acquisition, or have to sell stakes for capital.

Distressed asset opportunities are relatively rare, although rising interest rates may cause mortgage defaults that impact originators, offering acquisition opportunities. Fintechs are also seeking banking charters, which would make them direct competitors, further stimulating M&A. Finally, ESG is influencing the kinds of portfolios investors would like to hold.

PE activity:

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