Decline in banking M&A is a fundamental shift, not just a cyclical downturn, according to PwC research

Research from PwC has found that recent years' decline in banking mergers and acquisitions (M&A) is not simply due to a cyclical downturn but represents changes in the regulatory and economic environment.

The recent political and economic uncertainty is making it difficult to agree on valuations, predict future impairments, arrange funding and gain shareholder approval. The market instability is also having an effect on deal confidence, and therefore frustrating M&A activity.

Tom Winterboer, PwC Financial Services Leader for Africa and Southern Africa, says: "The picture is less gloomy in South Africa than in Europe and the US, but some financial institutions still have some significant restructuring ahead of them. Africa has the potential to generate increasing volumes of banking M&A over the next few years.

"South African banks are among those looking to other African markets for future growth, and the country remains the leading gateway into Africa for foreign entrants. Most major African domestic banks have international strategic or equity partners, but there is still potential for inbound M&A."

Winterboer says that South Africa's major banks' earnings growth and returns on equity compare favourably with those of its global peers.

According to PwC's report 'Brave new world: New frontiers in banking M&A', recent research carried out by PwC (known as Project Blue) identifies a range of factors driving a change in the financial sector. These include fiscal pressures, regulatory reform, customer behaviour, the shortage of skills, economic shifts and the future of M&A activity in the sector.

Simon Venables, PwC Head of Deals for Africa, says: 'The total number and value of global banking M&A transactions has declined steadily over the past few years. Banking deals have consistently accounted for the majority of financial services M&A over the past decade. The decline in M&A over the past three years – or excluding government-led deals, over the past five years – is not just a cyclical downturn, there are permanent changes taking place."

High growth economies are now homes to some of the world's largest and increasingly influential banks. A far broader range of institutions are initiating transactions than in the years leading up to the financial crisis. Banks from high growth economies are becoming more active acquirers, both in their home markets and abroad, and are establishing their own approaches including partnerships and distribution agreements.

Venables says that favourable demographics and a central role in trade between SAAAME countries (South America, Africa, Asia and the Middle East) are encouraging local and international players to increase their exposure to African banking. Further attractions include low levels of banking penetration, African banks' strong levels of deposit funding and the scope for buyers to improve acquirees' operational efficiency. The case for investment in African banking is clearly improving.

The report shows that Nigeria is another market that offers growing potential for M&A activity. The banking sector has gone through several rounds of restructuring in response to regulatory reforms and government intervention aimed at raising capital levels and strengthening balance sheets. Other African markets, such as Kenya, have similar potential for banking consolidation and rationalisation, in addition to their attractive growth prospects.
Private equity funds willing to invest in risk-carrying businesses remain in the minority, but are expected to change over time as regulators become more comfortable with private equity ownership, states the report.

"We should not expect banking M&A to return to its previous level, nor its previous patterns. In the longer term, patterns of banking M&A will become more complicated and less predictable," says Venables.

"Instead of returning to old patterns, banking M&A will continue to develop in new directions. As in other industries, it will become more important, not just to pick the right market, but also the right target," he adds.

Other findings of the report include:

  • Supported by rapid economic expansion, an increasing middle-class demand for banking products and a growing-net-worth segment, Asia-Pacific is likely to remain the most active region for banking M&A.
  • Brazil remains Latin America's most important banking market and will continue to generate M&A deals.
  • Restructuring will remain the most important driver of banking M&A in Western Europe over the next few years, as banks seek to focus on core businesses and exit peripheral activities.
  • The US looks poised to experience a fresh wave of consolidation among small and mid-sized banks. The Durbin Amendment and the Dodd-Frank Act are set to add to the costs of compliance and encourage small banks to strengthen their capital and seek greater scale.
  • Middle Eastern banks' appetite for outbound M&A has been selective; there is continued interest in nearby growth markets such as Turkey, as well as European private banking assets and the growing role of Islamic Banking in Central Asia and the Far East.