M&A: Bank restructuring to boost M&A numbers

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By:
Peter Lee
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Lots of small deals for FIG bankers… But no big transformational ones

The banking industry in Europe, and in particular the corporate and investment banking divisions of the large universal banks, stand poised to go through a profound restructuring and consolidation in the months ahead.

One question many bankers have a particular interest in wrestling with: how prominent a part of this restructuring will be mergers and acquisition between banks?

Banks are often the biggest customers of each other’s M&A departments, just as they invariably have been of each other’s debt-capital-markets businesses and often their equity-capital-markets businesses. But just as bank-bond and equity issuance has declined in recent months, so too has the volume of bank M&A activity.

Financial M&A down

Dealogic data show that the broadly defined financial services industry declined to be the third most active sector in M&A for 2011 behind real estate, and oil and gas. This is its lowest position since 1996, when it was also third.

And although the finance sector recorded the highest number of M&A transactions greater than $1 billion in 2011, with 56 such deals worth $151.1 billion, total volume of $256.7 billion was down 8% on 2010.

In the months ahead, M&A bankers are not expecting a surge of big deals, although these could resume when the industry has re-ordered itself.

M&A volume in the financial sector in 2011 – down 8% on the year before

Stefano Marsaglia, chairman FIG IBD at Barclays Capital, says: “Hostile M&A has disappeared. The large transformational deals, such as Commerzbank and Dresdner or UniCredit with Capitalia are on ice for now, but they won’t be on ice forever.”

There have been just glimmers of hope for FIG M&A bankers, as their customers adjust their business portfolios.

On January 12, RBS announced it was looking for possible buyers of its cash equity, corporate broking, equity capital markets and M&A advisory businesses. Many market participants suggest the bank will struggle to find any bank capable of or willing to pay more than a nominal price for them and RBS may bear much of the cost of redundancies.

However, RBS has enjoyed some success using the M&A market. Just days after announcing its planned withdrawal from equities and M&A, the majority state-owned UK bank sold RBS Aviation Capital – its aircraft leasing business, now the fourth largest in the world – to Sumitomo Mitsui Financial Group and Sumitomo Corporation for £4.7 billion ($7.3 billion). The sale boosts RBS’s tier 1 capital while also reducing wholesale funding requirements.

RBS group finance director Bruce Van Saun says: “Reaching agreement on a deal of this scale in such a volatile market is a significant success for our non-core division and a credit to SMBC [Sumitomo Mitsui Banking Corporation].”

Is it a model for more such M&A activity? Many will hope so. ING is now looking to sell its Asian insurance and investment management operations to a trade buyer, having abandoned plans to IPO them due to turbulent conditions in the equity market.

Deutsche Bank is reported to be receiving enquiries from potential buyers of its asset management division, which, after a strategic review last year, it decided might fare better under new ownership. It will retain as core only the domestic DWS business.

M&A volume in the financial sector in 2011 – down 8% on the year before

Marsaglia says: “If you look just at asset sales, there are big buyers from Asia, even Japan and parts of the Middle East that have been bidding for asset portfolios. Can this translate to M&A? Well, many buyers will be cautious and some constrained, but if you do have spare capacity on the capital and funding side, this could be a very good time to think about acquisitions. It’s a buyer’s market. And for large banks, I’m a big believer in the benefits of diversification.”

The whole thrust of banking regulation since the crisis of 2008 and 2009 has been to punish size and press for greater simplicity in banking structures to separate, for example, investment banking from retail, so as to ease wind-downs in the event of systemic or bank-specific stress. But there are limits to this approach.

Marsaglia adds: “It might make sense for a small, regional Italian bank to hunker down and concentrate just on Italy but that kind of reverse globalization makes much less sense for large banks.”

Indeed, at the country level, while banking sector rationalization might be driven by a need to reduce over-capacity, M&A is a natural part of the consolidation process.

Benefits of size

Olivia Frieser, head of European credit research at BNP Paribas, says: “At some level, the authorities will encourage consolidation and some banks will see an advantage in increasing in size. In Spain, for example, there are national consolidators, such as Popular and Sabadell, which might see an advantage to the point of greater systemic significance.”

In October, Popular announced the acquisition of Banco Pastor for a consideration paid in Popular shares equivalent to €1.3 billion and outlined a vision for the Spanish banking sector being dominated by five banks, of which Popular is determined to be one. This process still has some way to play out and Popular faces competition from Banco Sabadell, which in December signalled its own ambitions when it picked up distressed Alicante-based Caja de Ahorros del Mediterraneo for a nominal consideration in a deal supported by the country’s deposit-guarantee fund.

Less certain are the prospects now for larger cross-border bank deals, which will likely be challenged by regulators and not just on competition grounds. The appetite for national regulators to allow mergers will be limited by the memory of what happened to RBS, when it bought ABN Amro.

EU competition authorities have required banks that were propped up by state support to dispose of certain assets in recompense so as not to unfairly distort competition. Therefore banks such as AIB and KBC have had to sell some assets in emerging Europe, and these forced sales could continue to add cross-border M&A volume alongside more voluntary restructuring and attract willing buyers.

Premium for growth

Marsaglia says: “Not all of Europe is in crisis and there are growth markets of interest in Europe, such as Poland and Turkey, where entrants might still be prepared to pay a premium. Other than that, there will be a lot of financial institutions looking to sell off areas of their activities, especially where they are sub-scale.”

It remains to be seen how active emerging market investors might be in picking up assets in the developed Europe banking sector.

Olivia Frieser, BNP Paribas

On the first day of 2012, Singapore-based Temasek appointed John Cryan, former chief financial officer of UBS, to a new post as president of its European operations. Before stepping into the CFO role to help the Swiss bank through the darkest days of its crisis, Cryan had built his career as a financial institutions group investment banker and a close strategic adviser to banking clients on M&A deals.

Temasek has taken large strategic equity positions in Asian-based banks, including DBS, as well as Standard Chartered, which, though UK headquartered, is essentially an Asian bank. It has sometimes taken larger stakes in smaller banks in its home market.

Cryan’s new role didn’t hit the headlines, but lots of bankers Euromoney speaks to wonder whether Temasek will acquire bank status.

News broke just before Christmas of Sberbank buying SLB Commercial Bank in Switzerland as a platform for syndicated lending and trade finance in Europe.

This marks a second step since its first landmark acquisition outside the CIS of Austria’s Volksbank International in September for €585 million. Sberbank said at the time this was the first stage of its plan to go from being a large Russian bank to a large international one.

Assaf says: “Some of the emerging market banks will be tempted to seize opportunities. But in the next five years I expect strong regional banks to support the international expansion of their own clients rather than be tempted by a full acquisition, bearing in mind the return on equity in their local markets is more attractive than in the developed world.”