A revival of bank M&A is on the cards
As the dust settled from the crisis, M&A activity between banks stalled, falling by 24 per cent between 2014 and 2017, bucking the trend seen in the wider market where deal volumes are increasing exponentially1. Regulation has played a major role in this. Empowered by post-crisis legislation such as Dodd-Frank and Basel III, global regulators have imposed stricter capital controls on major lenders, while the US authorities have gone so far as to proscribe banks with ongoing compliance problems from growing their operations at all2.
Rather than expanding their businesses, regulators actively wanted banks to shrink them, conscious that larger and more complex institutions usually pose greater systemic risks. Not only does this make it harder for regulators to unwind failing firms in a crisis situation, but it compounds the chances of taxpayer funds being called upon in an emergency. More recently, however, regulatory attitudes in the US and EU towards bank M&A appear to be softening, although industry divisions about the actual merits of bank consolidation remain.
The need (or not) for national bank champions in Europe
European banking institutions have long-trailed their US equivalents in both market capitalisation and their ability to generate meaningful revenues3. For instance, one major US bank’s market capitalisation is greater than the combined value of eight well-known European providers4. In response, some EU regulators are entertaining the idea of encouraging deeper consolidation, in order to facilitate the emergence of bank national champions, who could potentially compete with some of these larger, global institutions.
The ECB’s banking union programme was widely seen as being very much in favour of accelerating cross-border M&A at EU banking groups, although experts concede the initiative has yet to spark widespread consolidation in the euro-area. While cross-border M&A has obvious economic benefits, some European banks are continuing to struggle under the weight of non-performing loans (NPLs) denting their attractiveness to would-be buyers5. Other impediments to M&A include regulatory fragmentation, namely the reluctance of certain member states to introduce cross-border capital and liquidity waivers6; the continued absence of a pan-European deposit guarantee scheme7; and significant divergences in key areas such as taxation, insolvency laws and the treatment of collateral8.
There are marked divisions though between the interests of local regulators and the ECB’s Single Supervisory Mechanism, with the latter taking a dim view of politically motivated consolidations9. The ECB has also spoken out against forcibly merging weak banks in the hope that these joint ventures will become stronger institutions10. Elsewhere, the EU’s competition commissioner has taken a tough stance on M&A - at least in other sectors - most notably blocking the proposed Franco-German merger between train manufacturers Siemens and Alstrom11. Furthermore, concerns about bank tie-ups have also been echoed by academics, who warn it could exacerbate systemic risks and jeopardise taxpayer funds12.
The APAC approach to banking M&A
While European leaders are agonising over whether to push ahead with creating national champions, APAC banks have adopted a more conservative approach towards cross-border acquisitions. Speaking at HSBC’s Financial Institutions Conference, Peter Enns, global head of FIG at HSBC, said Chinese banks such as ICBC– are mindful about the risks of expanding abroad, opting instead to execute small-scale buyouts in new markets, driven mostly by client demand. Elsewhere in the region, bank tie ups continue to be localised as opposed to international. For example, Taiwan’s CTBC has been on an acquisition spree, purchasing Tokyo Star Bank in 2014 outright, and procuring a 35.6% stake in Thailand’s LH Financial13.
US: M&A on the rise
US regulatory changes are likely to create an environment that is ripe for further bank M&A. Revisions to Dodd-Frank - through the Economic Growth, Regulatory Relief and Consumer Protection Act [also known as the Crapo Bill] – are likely to ease the compliance burdens currently facing US financial institutions. Under this rule-change, Dodd-Frank’s strict supervisory requirements will now only apply to banks whose assets are greater than USD100 billion, rising to USD250 billion in November 2019, a threshold that was previously cast at USD50 billion14. Dodd-Frank’s increased compliance costs often dis-incentivised banks from merging lest they breach the USD50 billion barrier, but the heightened threshold is likely to encourage more smaller and mid-tier providers to explore potential M&A synergies15.
Taxation reform could also prompt an upswing in M&A within the US banking ecosystem. In 2017, the US Tax Reform Bill was passed which slimmed down the corporate tax rate to a flat 21% providing a huge boost to bank earnings. Consequentially, a number of national and regional banks are sitting on large cash piles which could be deployed for M&A16.
A new model entirely
Digitalisation is rapidly disrupting the banking industry, and it will force financial institutions to change their historic operating models. While many dynamic fin-techs have developed a range of consumer friendly services, these companies often lack the distribution footprint and financial muscle of established banking institutions. At HSBC’s Financial Institutions Conference, a number of panellists concurred that it would be very difficult for fin-techs to disintermediate banks, arguing instead that collaboration was more likely, especially as it could help all parties deliver better product suites to clients. In fact, this is already happening in post-trade as incumbents increasingly partner with Blockchain/distributed ledger technology start-ups to expedite archaic processes such as KYC and AML checks.
1, 2 Reuters (February 23, 2018) US banks set for M&A wave as Trump cuts red tape
3, 4, 7 Financial Times (January 30, 2019) Europe should be wary of the lure of bigger banks
5, 6 ECB (November 15, 2018) Euro-area banking sector – current challenges
8 Financial Times (July 11, 2018) Banking M&A The Quest to create a European champion
9, 10, 11, 12 Financial Times (March 19, 2019) ECB bank supervisor Enria criticises national champion mergers
13 Euromoney (May 9, 2019) Is it time for Asian banks to go global?
14, 15 Skadden (January 17, 2019) Regulatory relief may generate increased M&A activity among banks
16 Deloitte – 2019 Banking and Capital Markets M&A outlook