2022-09-27-KPMG_Global-Global_Banking_M_A_Trends_1H22_Looking_ahead_47页_1mb

Summary of Global Banking M&A Trends 2022

Core Content

The global banking M&A market experienced a strong recovery in 2021, with a 32% increase in deal volume and a 42% rise in deal value. This reflects the economic rebound as the worst effects of the pandemic subsided. However, the first half of 2022 saw a decline in deal volume due to the Russia-Ukraine war, economic disruption, and inflation, while deal value remained strong, particularly in ASPAC.

Main Views and Key Points

2021 Market Overview

• Deal Volume and Value: 1,835 deals worth USD289 billion were announced in 2021, showing a notable increase compared to 2020.
• Regional Activity:
  • North America had the highest share of deal value.
  • Europe and ASPAC had similar deal volumes, but Europe's deal value was lower due to the impact of the war and sanctions.
• Drivers:
  • Regulatory pressure to strengthen banks and reduce risk.
  • Consolidation efforts to achieve cost efficiencies and scale.

1H22 Market Overview

• Deal Volume Decline: A 18% drop in deal volume compared to 1H21, attributed to geopolitical tensions and economic instability.
• Deal Value Increase: Despite the decline in volume, deal value rose to USD137 billion, driven by high-value transactions in ASPAC, notably Citigroup's retail banking businesses.
• Notable Deals:
  • UOB acquired Citigroup’s consumer banking operations in Indonesia, Malaysia, Thailand, and Vietnam for USD3.7 billion.
  • Citigroup sold its consumer banking business in Taiwan to DBS for USD1.6 billion.
  • Toronto-Dominion Bank acquired First Horizon Corporation for USD13.5 billion.

Regional Outlook

• Europe:
  • Banks face significant exposure to Russia, increasing risk from sanctions and inflation.
  • Valuations remain low, with an average P/TVB of 0.8x.
  • Regulatory support for consolidation is growing, though cross-border deals are complex.
• North America:
  • Banks are trading at higher P/TVB ratios (1.7x for Canadian banks vs. 1.4x for US banks).
  • Regulatory scrutiny of large transactions is rising, particularly in the US.
  • Banks are focusing on cost control and efficiency.
• ASPAC:
  • Banks are well-capitalized, with Indian banks trading at an average of 2.9x P/TVB.
  • China's banking sector is active due to consolidation of regional SMBs and joint ventures.
  • Digitalization and ESG are key themes, with increasing interest from private equity.

Key Themes in 2022 and Beyond

1. Digitalization:

   • Accelerated due to the pandemic and competition from fintechs.
   • Banks are investing in digital capabilities to improve customer interaction, reduce costs, and enhance operational efficiency.
   • Fintech partnerships and acquisitions are becoming common to expand product offerings and diversify revenue streams.

2. ESG Integration:

   • ESG is becoming a central factor in M&A, with banks and their clients under increased scrutiny.
   • Banks are expected to incorporate ESG considerations into their operating models.

3. Scaling Operations:

   • Banks are pursuing deals to expand product lines, technologies, and geographic reach.
   • Cost efficiencies and franchise strength are key motivations for consolidation.

4. Asset Quality:

   • NPL (non-performing loans) sales are expected to continue in Europe and certain ASPAC countries.
   • Inflation and rising interest rates are expected to improve asset quality and profitability.

5. Regulatory Environment:

   • Regulatory tailwinds in Europe and evolving regulations in ASPAC are shaping deal dynamics.
   • In the US, large transactions face heightened scrutiny, affecting deal activity.

6. Competition Among Buyers:

   • Private equity, fintechs, and conglomerates are all vying for bank targets.
   • Increased competition is driving innovation and strategic repositioning.

7. Interest Rate Hikes:

   • Rising inflation has led to higher interest rates, impacting profitability and bank valuations.
   • Banks with stronger interest margins (like US banks) are better positioned.

Impact of the Russia-Ukraine War

• Economic and Geopolitical Disruptions:
  • The war has increased macroeconomic uncertainty, affecting bank valuations and deal activity.
  • It has intensified inflationary pressures, disrupted supply chains, and raised cybersecurity risks.
• EU Exposure:
  • EU banks have significant exposure to Russia, with total exposure to Russian counterparts reaching EUR75.3 billion and to Ukrainian counterparts EUR10.0 billion by the end of 1Q22.
• Sanctions and Reputational Risks:
  • Sanctions have created legal, reputational, and operational challenges.
  • Banks are exiting Russia, leading to potential financial and legal complications.

Risks and Challenges

• Credit Risk: Increased due to exposure to Russian and Ukrainian entities and their counterparties.
• Cyber Risk: Heightened due to attacks on Ukraine and potential vulnerabilities in Russian-based operations.
• Profitability Risk: Uncertainty may lead to a shift in customer behavior towards safer products, reducing income from fee-based services.
• Market Risk: Higher volatility, especially in commodities, and increased settlement risks.

Outlook

• The M&A landscape is expected to remain active in 2022, with further domestic consolidation, especially in Europe.
• Digital transformation and ESG considerations are likely to dominate discussions and strategies.
• Private equity is increasingly interested in the banking sector, especially in digital and fee-based services.
• Regulatory changes and geopolitical tensions will continue to influence deal dynamics and strategies.

Conclusion

The global banking M&A market is navigating a complex environment shaped by the Russia-Ukraine war, inflation, and regulatory shifts. While deal volume has declined in the first half of 2022, deal value remains robust, particularly in ASPAC. Europe continues to face significant challenges due to its exposure to Russia, while North America and Asia remain more resilient. The future of M&A will be driven by digitalization, ESG, and the quest for scale and efficiency.