Consolidation: Bank M&A volume declines further
Banks have a long list of divisions up for sale but there are almost no buyers – a worrying sign for shareholders and regulators.
In the run-up to Christmas, Société Générale offered a little stocking filler to its shareholders when it announced it had agreed with to sell its majority stake (77.17%) in National Société Générale Bank (NSGB), its Egyptian subsidiary.
The acquirer will also pick up from Société Générale the stakes not already owned by NSGB in certain local subsidiaries, bringing the total consideration payable to the French bank up to $2 billion.
At the closing of the transaction, which is still subject to approval by the Central Bank of Egypt but expected in the first half of this year, Société Générale will book a net gain of around €350 million, boosting its Basle III pro-forma core tier 1 at the end of 2013 by close to 30 basis points.
Oddly, the share price of NSGB had been falling in the months leading up to the announcement of the sale, which was priced at 10% below the previous day’s close. Nonetheless, that still values the bank, which recorded a 20% return on equity for the first nine months of 2012, at a multiple of two times book.
In normal circumstances, shareholders might have questions about a bank selling off at a discount a cash-generative asset with decent returns on equity in an emerging market with potential for growth. However, these are not normal circumstances for European banks.
That modest one-off capital gain will help Société Générale more comfortably reach its fully loaded B3 CET1 ratio target of 9% to 9.5% by the end of this year. And that trumps all other considerations. The valuation is probably a fair deal, given the political environment in Egypt, suggest bank analysts at Credit Suisse.
They note that the French bank’s stock had been suffering for some time from investors’ negative perception of its capital position and management’s ability to make progress on asset disposals. This announcement ticked both boxes at one go.
The deal is a reminder, however, of just how muted mergers and acquisitions activity has been between banks, even as they struggle to define new business models and adjust their balance sheets and business portfolios.
Going into the final week of last year, Dealogic data show that M&A volume in the financial sector globally was running 15% below 2011, which was itself far from a banner year.
Banks such as KBC and Dexia, which have been mandated by EU competition authorities to make disposals to compensate for state aid received in the crisis, account for much of the M&A activity that has taken place even when – such as ING selling its Canadian and UK direct banking arms – they have executed deals beyond those stipulated by the authorities.
Talk to FIG bankers working behind the scenes on potential M&A deals and it is clear a large backlog of transactions is building up. There are plenty of sellers looking to dispose of a long list of various types of businesses, including asset management, private banking and even large parts of corporate and investment banking divisions.
However, when M&A bankers probability-adjust for the likelihood of deals getting done, they say they will be lucky if 20% of them happen. They will be cracking open the best champagne if 30% of them ever see the light of day.
The list of potential buyers is very short, other than for banking businesses rich in deposits, which is why ING was able to sell its Canadian direct arm to Bank of Nova Scotia and its UK arm to Barclays last year.
Some stronger US and Japanese banks have picked up loan portfolios from retrenching European lenders but almost no one has managed to sell, for example, any of the large and supposedly stable asset management businesses quietly being touted around. After a review last year, Deutsche, for example, rather embarrassingly decided to redesignate its asset management division as a core business after all.
This is troubling to shareholders, bank managements and those regulators still nervous when they see half of the banks in Europe still with loan-to-deposit ratios well over 100%. Portfolio investors are reluctant to support rights issues, other than in exceptional circumstances, such as to fund Julius Baer’s cleverly structured acquisition of the international wealth management business of Merrill Lynch.
If banks cannot raise new equity or sell divisions to other banks, they are stuck in zombie mode, slowly deleveraging by curbing new lending and ever more reliant on central banks to prop them up.
Analysts at UBS paint a bleak outlook for banks next year as they enter what is shaping up to be one of the lowest growth environments of recent times, characterized by weak credit demand, margin pressure arising from the low rate environment, difficult capital market conditions and greater regulatory constraints.
Regulators have a lot on their plates but they may need to think of ways to encourage new entrants – for example private equity and cross-border acquirers, including from emerging markets – to bring additional capital and renewed competition to the banking sector.