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How scale, capabilities and rebalancing will drive banking M&A
There was a modest rebound in banking and capital markets deal activity over the past two quarters. A handful of sizable deals were completed, with several more in the pipeline. The current pace of dealmaking, however, is not enough to relieve the competitive and cost pressures building up in the industry. Those pressures are likely to spark future mergers or divestment activity as banks pursue new operational configurations that align with their long-term vision and value-creation focus. The priorities for banking leaders continue to be strengthening resilience, liquidity and efficiency, while adapting to changing customer expectations and the competitive landscape. The deals outlook falls into three categories:
- Achieving size. Big banks whose profits expanded as interest rates increased substantially likely will look for strategic options to strengthen their positions and attain additional scale to increase efficiencies. These banks will aim to consolidate their presence in key markets, grow their geographic reach and use their scale to invest in technology and innovation.
- Adding capabilities. New and/or deeper and richer capabilities to serve clients are essential if banks are going to tap new streams of revenue. Banks are continuously looking for innovative technological assets that broaden their current product and service offering or give them unique capabilities and a strategic advantage.
- Adjusting portfolios. As risk weights and capital charges change, banks will need to explore which assets are non-core and can be put on the block to free up growth capital and improve return profiles. These assets may include capital-intensive, low-margin or high-risk businesses and non-strategic geographies. By divesting assets, banks will be able to focus on their core competencies, streamline their structures, redeploy their capital into more attractive areas and increase capital to meet rising regulatory capital requirements.
How market conditions are impacting M&A strategy
The banking sector faces a complex mix of forces that are impacting deal activity. Chief among them is an uncertain economy, stricter merger scrutiny and, under the Basel III Endgame proposal, a need for more capital. Bigger banks have an edge in handling the higher costs and capital needs of the Basel III proposal. For smaller banks, however, growing through M&A can be complex and expensive. For example, when considering potential deals, executives are putting more emphasis on knowing the transaction’s effect on capital or whether it involves acquiring assets with high capital costs.
Buying a bank that is in distress can alleviate those challenges. But to pull off a distressed deal requires a very different way of working compared to the traditional takeover process. To be prepared for a distressed deal, banks should assemble a quick response team made up of leaders from across the institution. That team should perform dry due diligence runs so they’re prepared to do that work under the pressure of a compressed timeline set by regulators.
“In a fast-changing and competitive market, banks need to be proactive, strategic and agile to capture value and growth.”
Banks that prepare can seize deal opportunities
The bottom line
Banking and capital markets deals may continue to be uneven, but we expect more deals in the months ahead due to the industry’s challenges in finding new areas for growth, investor pressure to expand margins and the growing expense of adopting technology.
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