Q1 2019 financial services M&A value rises as banks look cross-border for growth

  • US$25.7 billion in total value was announced over the first quarter of this year

  • Deal value is up 17% quarter-on-quarter

  • Deal volume fell 29% to 189 deals quarter-on-quarter

Cross-border financial services deal value in Q1 was up both year-on-year (4%) and quarter-on-quarter (17%), despite total volume falling over both time periods.

In the years after the 2008 financial crisis, banks mainly focused on restructuring, including through strategic disposals of non-core assets. UBS and HSBC, for example, exited their respective Brazilian businesses. 

More recently, ten years after the crisis, banks have begun to focus on M&A as a channel for growth, in order to gain scale, or leverage synergies or new technology. In the United States, BB&T’s planned US$28 billion acquisition of domestic peer SunTrust is the first significant banking merger in a decade, and is unlikely to be the last. In the United Kingdom, the Financial Times has reported that Barclays has been, among other possible options, exploring a potential merger with Standard Chartered in response to activist investor Edward Bramson building a 5.2% stake in the bank through his fund Sherborne. 

FinTech draws continued interest 

Banks are also increasingly aware of the threats and opportunities from the burgeoning FinTech sub-sector. Globally, FinTech investment more than doubled to US$111.8 billion last year, with cross-border activity totaling US$53.5 billion, according to KPMG. 

Deals like the US$38.4 billion tie-up between payment services providers Fiserv and First Data, announced in January 2019, demonstrate how more traditional providers of financial technology and payments infrastructure are consolidating in the face of growing threats of losing market share to start-ups like Square, which was founded in 2009 and listed on the New York Stock Exchange in 2015, and iZettle, founded in 2010 and acquired by PayPal for US$2.2 billion in 2018. 

The largest cross-border deal in financial services of 2018, the US$14 billion Series C investment in Ant Financial, was one among a flurry of FinTech deals. Investors in that round included Carlyle, Warburg Pincus, General Atlantic, Temasek, and the Canada Pension Plan Investment Board (CPPIB), among others. 

Investment rounds of Ant’s size are rare, but deal values are not the only indication of a significant transaction. Q1 saw London-based open banking app Bud raise US$20 million from investors including HSBC, an example of how large traditional banks are seizing opportunities offered by regulatory changes. Bud is one of several FinTech startups taking advantage of the UK’s Second Payment Services Directive (PSD2), which allows consumers access to their financial data and gives them the ability to share it with other financial institutions. 

Large banks have been actively investing in and acquiring FinTech startups. Other financial institutions also see the value in using technology to offer wealth management services to consumers who previously could not afford them. With populations in many European countries growing older and governments shifting the onus for retirement planning and pensions onto individuals, FinTech startups in the asset management space are attracting interest. Robo-advisory startups like SigFig and Betterment have developed software to automate investment advice and have received investments from UBS and Citi, respectively. 

Japanese banks look abroad for growth 

Aging populations, along with ultra-low interest rates, are among the reasons Japanese financial institutions have increasingly looked abroad for avenues of growth. 

The largest Q1 2019 cross-border deal in the financial services sector saw Japan-based MUFG Bank acquire Germany-based DZ Bank’s aviation finance business for US$6.3 billion. MUFG, Japan’s largest financial institution, has been leading the way in outbound activity in the financial services sector, acquiring Australian asset management group Colonial First State from the Commonwealth Bank of Australia for US$2.9 billion last year and building up a 40% stake in Indonesian-listed lender Bank Danamon for US$2.4 billion, with the goal of eventually taking over the bank. 

The continued growth of air travel and the higher returns in aviation finance compared to other types of investments has drawn a flood of interest into the market, particularly among Japanese banks. Tokyo Century Corporation invested US$200 million for an undisclosed stake in Aviation Capital Group after previously acquiring a 20% stake in the U.S.-based aircraft leasing firm for US$596.3 million in 2017. Last year also saw significant Japanese outbound deal activity in the aviation space, as demonstrated by Orix’s acquisition of a 30% stake in Ireland-based aircraft leasing firm Avolon for US$2.2 billion. 

Outlook 

At the beginning of the year, regulatory changes requiring “ring-fencing” — the separation of investment banking from retail banking — came into effect in the UK. Financial institutions spent much of 2018 focused on internal restructuring to prepare for this change, as well as for Brexit, leaving little focus for M&A. But with financial institutions in a better, more stable position than they’ve been at any point in the past decade, many feel confident to undertake M&A. Increasing consumer demand for more convenient and user-friendly digital products should only further encourage deal activity.

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