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Summary of Deloitte's 2018 Banking and Securities M&A Outlook

Core Content

Deloitte's report provides an analysis of the state of M&A activity in the banking, specialty finance, investment management, and fintech sectors as of 2017, with a focus on the outlook for 2018. It highlights the factors influencing deal activity, the trends observed in 2017, and the expectations for 2018.

Main Views and Key Information

Banking M&A in 2017

• Deal Volume: 250 deals were announced in 2017, nearly matching 2016's 249.
• Deal Value: The average deal value was $159.8 million, slightly lower than 2016's $161 million.
• Largest Deals: The top deal was the $2.19 billion acquisition of Astoria Financial Corporation by Sterling Bancorp.
• Regional Activity: The Midwest and Southeast had the highest deal volumes, with the Southeast also leading in high-value transactions.
• Target Size: Most deals involved small banks with assets under $1 billion, due to low interest rates, regulatory compliance costs, and the need for scale.
• Regulatory Uncertainty: Delays in regulatory leadership changes and uncertainty around tax and healthcare reform contributed to the subdued M&A activity.

Banking M&A in 2018

• Second-Half Momentum: Expect increased deal activity in the second half of 2018 due to regulatory clarity, tax reform, and rising interest rates.
• Valuation Trends: Banks may face challenges with high valuations, which could either prompt buyers to act or lead to a market correction.
• Strategic M&A: Larger banks are expected to acquire fintech capabilities, while smaller banks may consolidate. Private equity firms may also continue to monetize crisis-era investments.

Specialty Finance M&A in 2017

• Deal Volume: 66 deals in 2017, compared to 63 in 2016.
• Deal Value: The average deal value dropped significantly to $299 million from $655 million, excluding GE tail-end transactions.
• Key Deals: Notable transactions included United Rentals' acquisition of Neff Corporation and LBC Capital's purchase of NCF Holdings LLC.
• Market Pressures: Continued low growth in retail and interest rate pressures may drive consolidation in the sector.

Specialty Finance M&A in 2018

• Focus on Scale: M&A activity is expected to continue with a focus on driving scale and improving efficiency.
• Competition-Driven Deals: Firms may consolidate to counter competition from lending banks.
• Cross-Border Opportunities: International investors and PE firms may look to acquire US specialty finance assets due to less restrictive ownership regulations.
• Retail Credit Card Portfolios: With declining retail sales, banks and specialty finance firms may acquire and white-label credit card portfolios for cost efficiency.

Investment Management and Securities M&A in 2017

• Deal Volume: Increased to 219 from 186 in 2016.
• Deal Value: Rose to $324.4 million from $191 million.
• Key Deals: SoftBank's $3.3 billion acquisition of Fortress Investment Group and the $2 billion consortium purchase of Focus Financial Partners.
• Strategic Motives: Consolidation is seen as a way to build scale and enhance distribution channels.
• Securities M&A: Declined in both volume and value, with fewer transactions and lower average deal value.

Investment Management and Securities M&A in 2018

• Profitability Pressures: IM and securities firms face ongoing challenges with profitability due to pricing pressure and regulatory constraints.
• Partnerships and Consolidation: IM-to-IM partnerships and bolt-on acquisitions are expected to become more common to enhance scale and back-office efficiency.
• Regulatory Impact: Changes to prudential standards, DFAST, mortgage lending, and the Volcker Rule may significantly influence M&A activity.

Fintech M&A in 2017

• Deal Volume: Declined from 209 in 2016 to 140 in 2017.
• Deal Value: Average deal value fell to $255 million from $376 million.
• Strategic Importance: Despite lower volume, fintech acquisitions remain strategically valuable for digital transformation and cost reduction.
• Key Targets: Back-office technologies, digital lending platforms, and payment processors were in high demand.

Fintech M&A in 2018

• Continued Demand: Fintech capabilities will remain in demand as banks seek to improve digital customer experience and streamline operations.
• Alliances Over Acquisitions: Alliances and joint ventures may outpace acquisitions due to concerns about outdated technology and cultural fit.
• Consolidation in Payments and Lending: The payments and digital lending sectors are expected to see continued consolidation.
• Blockchain Potential: While still in early stages, blockchain could become a key area for M&A as its potential for disintermediation gains traction.

Trends and Drivers for 2018 M&A Activity

• Regulatory and Legislative Reform: The Trump administration's proposed changes to FSI regulations, including raising the asset thresholds for SIFI designation and DFAST, could reduce regulatory burden and boost M&A activity.
• US Tax Reform: The tax reform legislation lowered corporate tax rates, providing a cash tax benefit and increasing capital availability. However, it also reduced the attractiveness of NOLs for M&A.
• Interest Rates and Valuations: Rising interest rates and higher valuations may have mixed effects on M&A, with some firms relying more on organic growth and others using acquisitions for stability.
• Other Influencers: Factors such as loan growth, capital availability, and the evolving fintech landscape will also play a role in shaping 2018 M&A activity.