M&A Predictor 2018: Financial Services | KPMG | AU
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M&A Predictor 2018: Financial Services

M&A Predictor 2018: Financial Services

Continued activity in financial services is on the cards again, driven by a range of factors including the continued divestment of non-core assets by Australian Banks, increased private equity interest, the growth of non-bank lenders, and increased demand for Australian financial services assets from global players. For the rest of 2018 and beyond, the outcomes of the Royal Commission are likely to influence further divestment decisions.

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Australian outlook – Financial services in the spotlight

We have seen significant momentum in Mergers and Acquisitions (M&A) activity in financial services over the past 3 years, and we expect this momentum to continue for the rest of 2018.

In recent times we have witnessed a ground shift in the landscape as banks have looked to proactively divest various divisions, in particular life insurance and wealth management businesses, with a number of large transactions taking place. This has resulted in a very buoyant M&A environment.

We expect this buoyancy to continue as banks exit non-core assets, and private equity appetite to invest in financial services assets continues to grow. The continued emergence of non-bank lenders, roll-up of non-bank financial services, and maturity of fintech will also support activity.

Royal Commission a key driver

The impact of the Royal Commission on financial services is particularly interesting. We believe it will be a driver for a number of future asset sales, and potential M&A activity around other non-bank financial institutions. What happens with AMP, under the microscope at the Royal Commission, is another interesting theme.

Given the adverse findings against a number of financial institutions that have come to light so far, we think it likely that banks will continue to streamline their operations and exit various divisions that have been revealed as problematic. The issue of trust will also support the growth aspirations of non-bank lenders and challenger brands.

The timeframe for this remains unclear. It is unlikely that this process will take place in the short term as the commission still has some way to go.

This divestment process is likely to create significant opportunities in the market. We are likely to see a range of assets in the ‘sweet spot’ for private equity, or other internationals looking to get into the Australian market.

Indeed, we continue to see private equity interest in financial services build.

Life insurance and wealth transactions to continue

ANZ, CBA and NAB have all recently sold their life insurance businesses. It has been reported that AMP and Suncorp are also considering options for their life insurance businesses.

CBA has also announced the proposed divestment of its global investment management business Colonial First State Global Asset Management (CFSGAM), and NAB has announced its intention to divest its MLC Wealth business.

There are also a number of other potential transactions pending, including IPOs which we think will continue to support the strength of the market for financial services M&A activity in the back half of 2018 into 2019.

Non-bank lenders, fintechs tipped for growth

Another key theme is the continued growth of non-bank lenders and fintechs. Specifically, what we are seeing is the trend of fintechs and various non-bank lenders coming to market to fund growth objectives. Prospa, an online small business lender, is a recent example of this.

Global players on the hunt

We are seeing big global players participating in sales processes for Australian financial services assets. This is occurring because the investment credentials stack up. Growth opportunities in their core markets are limited outside of M&A. They bring global capability, geographic diversification and scale. They are attracted to Australia because Australia is fairly low risk and provides stability, growth and relative returns.

Global outlook

Challenges remain but we expect a year of robust M&A activity in the Financial Services sector as non-sector players – from private equity houses and pension funds to Chinese and Japanese conglomerates – continue to actively pursue deals. At the same time, look for interest in fintech-related deals to remain hot as banks and insurers strategically seek transformational technologies to remain competitive and growing.

We expect the value and volume of M&A deal activity in the Financial Services sector to increase by more than 10 percent for 2018 amid numerous positive factors that include:

  • strengthening G-SIFIs; proposed removal of barriers to EU bank mergers
  • increased focus on M&A to drive transformation in insurance
  • strength of the Asian and US economies
  • the increasing role of both private equity and new entrants to the market
  • rising interest rates.

Source: Dealogic, KPMG analysis

The year was off to a promising start during the first quarter of 2018, with the value of deals rising to US$78 billion compared to US$55 billion in Q1 2017. Volume of deals in Q1 2018 was lower at 642 compared to 800 in Q1 2017. Average deal value was higher at US$121 million compared to US$68 million a year earlier.

"The ongoing flurry of US-based activity reflects the consolidation of the regional banking sector combined with private equity investors eagerly pursuing financial services assets," says Stuart Robertson, Global Financial Services Deal Advisory Lead, KPMG in Switzerland. "At the same time, the trend in overseas acquisitions by Japanese finance institutions will continue, while China's easing of limitations and shareholdings by foreign investors should spark a significant increase in inbound investments there during 2018 and over the medium term."

Stuart notes that private equity houses, private investors and pension funds, as well as Asian conglomerates, accounted for about 35 percent of 2017 deals. "The challenge going forward as we monitor this trend will be to determine who the big buyers are going to be in 2018. This unpredictability is adding a new and exciting dimension to the market." (Source: Financial Services experience a surge in cross-sector M&A, KPMG International, 2018).

The level of private equity dry powder represents a huge opportunity across all regions in 2018, with a focus on deploying funds into all sectors of financial services, Stuart adds.

Regionally, beyond the action in the US, China and the UK, we anticipate increased consolidation activity in Germany, Italy, Indonesia and India. We expect major regulatory concerns to decrease as clarity, primarily over Basel IV, now emerges. Over the past years, banks have been very cautious about global expansion and focused more on their operating models with limited M&A focusing more intently on domestic and regional markets. Their strategies are focusing much more on M&A for 2018 and beyond.

"It's noteworthy that in 2017, about three-quarters of bank deals were in their domestic markets and this trend could continue, along with deals involving NPLs predominantly involving international buyers. At the same time, the intense focus on fintech and robo -advisory innovation will continue globally. There is a massive amount of liquidity sitting on the sidelines and waiting to be invested," says Silvano Lenoci, Corporate Finance Partner, KPMG in Italy.

For additional insights into global 2018 M&A banking trends, read KPMG's Continuing to Climb report.

On the insurance front, says Ram Menon, Global Insurance Deal Advisory Lead, KPMG in the United States, there is also an abundance of capital to invest and insurers will continue to chase inorganic growth opportunities. "We expect 2018 deal activity to be very strategic, as the insurance industry – like the entire financial services sector – faces huge demand for transformation and innovation that will drive greater customer engagement and top line growth. The focus globally will be on deals that provide opportunities to transform business models, access emerging innovative technologies and modernise operating models."

Reviewing 2017

The number of deals for the sector overall in 2017 was relatively flat at 3,020 compared to 3,072 in 2016, while the value of 2017 deals was US$253 billion, down 20 percent from US$318 billion in 2016. Results are in line with our 2017 Predictor outlook that noted continued pressure on the banking sector amid issues that included Basel IV, a general lack of capital and a large legacy on the non-performing loan side for the next few years.

The volume of 2017 deals in insurance was relatively flat (down 0.7 percent) while the value of deals increased by 128 percent. The 128 percent increase in insurance is largely the result of one megadeal that also proved to be the biggest deal of 2017 in the Financial Services sector. (Source: MergerMarket, KPMG analysis)

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