Deal flow climbs in European financials as forces collide

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The impact of a range of powerful forces is revealed in a wide-ranging report into M&A trends in European financial services by the professional services leader EY.

The research suggests that the first half of 2018 has been much the strongest in terms of the value of deals in the sector in recent years. There were US$35bn of deals in the European financial sectors in the first half, compared to only US$22bn in the first half of 2017 and US$26bn the previous year, While the number of deals does not reveal such a strong picture, that figure is still up around 20% on the first half of 2017, at 233.

The report looks at banks, insurance and wealth management as separate entities and concludes that the banking and capital market sub-sector has the strongest momentum. The value of deals in this segment rose from US$10bn last to US$24bn, much helped by large deals such as CME’s US$5.7bn purchase of NEX and CYBG’s US$2.2bn acquisition of Virgin Money. Indeed the UK accounted for nearly half of the value of deals across the while sector in the first half.

The report points to a number of distinct trends which give confidence that this is part of a structural imperative to do deals, rather than a temporary upward blip. In particular, the growth in cross-border deals in payments technology seems indicative of a need that many banks feel to upgrade their capability in a rapidly developing market.

In contrast, there has also been a marked upswing in the number of banks divesting large chunks of non-core businesses, because they either do not fit geographically or the banks are looking to focus on their most profitable activities. Prime examples of this include Deutsche Bank’s sale of its Portuguese operations to Abanca, and Santander selling a 49% stake in WiZink to Varde. There is also a marked upswing in banks, especially in Spain and Italy selling non-performing loan portfolios as private equity’s confidence in, and appetite for, such assets grows.

In addition, EY points to persistent rumours of the growing probability of very large mergers, such as between Unicredit and Societe Generale, the evident desire of many of the exchanges to increase their scale and the tighter regulatory focus on fintech as areas which are likely to keep those working in M&A gainfully active  in the forseeable future.

European insurance has also seen a sharp upturn,  with US$9bn of deals in the first half representing more than twice the value of any of the previous three years at this point. The number of deals has also risen from 45 last year to 61 this year, although that figure is only in line with the two prior years.

Here the impact of a small number of huge deal is even more tangible, with Phoenix’s purchase of Standard Life’s UK insurance business alone accounting for almost half of the value. But here also, EY points to strong forces leading to a sustained appetite for deal-making rather than a blip.

The enthusiasm of primary carriers for reinsurance has clearly grown and there seems global demand for speciality insurance. The development of “Insuretech” is clearly also an increasingly important factor. Meanwhile, there are also signs of disposal activity growing, with companies looking more critically at low return businesses, especially in areas such as life & health, where enduringly low interest rates are putting pressure on profits.

In wealth and asset management, the value of deals is actually down sharply on last year, essentially because of the lack of any deals to compare with the huge merger of Standard Life with Aberdeen, and Janus’ purchase of Henderson. But the number of deals grew from 53 in the first half of 2017 to 66 this year, and the dynamics behind deal flow seems at least as compelling as in banking and insurance.

Indeed the impact of fintech, exemplified by Invesco’s acquisition of Intelliflo and Aberdeen’s joint venture with Virgin Money, the cost of regulation and other cost pressures mean that the need for scale has become more urgent in the last few years. Businesses with US$10bn of assets under management or even more, which were able until recently to generate a respectable return on capital, can often no longer do so. The sale of Speirs & Jeffrey to Rathbone seemed a particularly stark recognition of this.

Meanwhile, here as much as everywhere else in the sector there is evidence of companies both looking to expand their geographic capability, such as Julius Baer’s purchase of Kairos in Italy, and also dispose of sub-scale units.

Thus there seem many reasons behind the upswing in deal flow, with the strategic requirement to respond to the rapid changes in markets only growing. In the absence of an unforeseen shock in markets, it seems that the financial sector will predictably remain one of the busiest areas of the market.

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