2018 Banking M&A Outlook
Holding on to the optimistic momentum
2017 was a year in which there was an optimistic momentum for increased deal-making in banking, specialty finance, investment management and securities and fintech. For 2018, the optimistic momentum is expected to hold on. Read the 2018 Banking M&A Outlook to find out what trends we expect to occur.
Given the scarcity of attractive properties, 2018 specialty finance deal volume should be similar to that of 2017 and focused on driving scale. Some of our expectations are as follows:
- Competition-focused deals: We expect organizations to continue consolidating and making financial plays to take out the competition - especially in light of lending banks’ product expansion efforts to cut into specialty finance’s market share.
- Interest rate pressures: Specialty finance companies, especially those that secured their funding from banks, tend to be more earnings sensitive to interest rate increases than other financial services institutions.
- Retail credit card portfolio opportunities: Sluggish growth for store-based retail has had substantial ramifications for retailers of all sizes.
- Continuing profitability pressures: Pricing pressure and regulations constraining capital, liquidity, and leverage are making it difficult for IM and securities firms to meet historical norms of capital return.
- Partnering strategies: As margins continue to get squeezed, we expect IM and securities companies to include M&A in their toolbox of 2018 cost transformation levers. One likely approach is IM-to-IM partnering and/or consolidation to build requisite scale and provide distribution channels with more offerings and enhanced consumer engagement functions.
Trends and drivers of 2018 M&A activity
2018 may be the year that banking and securities M&A truly gets in gear. Favorable policy developments are easing regulatory constraints; interest rates are steadily rising; the tax reform bill should benefit bottom lines; loan growth is projected to increase; and abundant capital is available to invest.
Several of the key provisions that have potential implications for financial services M&A:
- Enhanced prudential standards: The bill proposes to raise, from $50 billion to $250 billion, the statutory asset threshold for the imposition of enhanced rudential standards (EPS). Banks with total assets between $50 billion and $100 billion would be exempt immediately.
- Dodd-Frank Act Stress Test (DFAST): The bill would raise, from $10 billion to $250 billion, the statutory asset threshold for DFAST. For banks with total assets between $100 billion and $250 billion, the FRB would be required to conduct periodic supervisory stress tests to evaluate whether these companies have the capital, on a total consolidated basis, necessary to absorb losses as a result of adverse economic conditions.
- Volcker Rule: Banks with less than $10 billion in total assets and total trading assets and trading liabilities that are not more than five percent oftotal assets will be exempt from the Volcker Rule.
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