2016 Australian FSI M&A predictions has been saved
2016 Australian FSI M&A predictions
Key themes that will drive activity
The 2016 Australian financial services M&A predictions sets the key themes that we believe will drive M&A activity within the Australian financial services (FSI) sector in 2016.
The 2015 calendar year saw over $24 billion of announced FSI M&A deals in Australia, principally driven by transactions in the banking and securities and real estate sectors. Download the chart to view the deals value by sector.
Some of our predictions have a stronger basis than others, but all will likely be on the minds of M&A professionals, financial institution executives and advisors as we begin 2016.
The depreciation of the Australian dollar (AUD) over the past two years has been significant, with the AUD depreciating 11% against the US dollar (USD) in 2015 alone. As a result, assets in Australia have become cheaper to foreign buyers who still enjoy a low interest rate environment at home (i.e. US-buyers).
We believe the depression of the AUD (which may continue following the US Fed’s decision to raise US interest rates) will drive strong interest in Australian institutions and assets from foreign buyers. Recent examples include: Equifax’s bid for Veda, Western Union’s bid for Ozforex and the acquisition of GE Capital’s consumer lending portfolio by a consortium of US and European private equity funds (incl. KKR, Varde and Deutsche Bank).
Notwithstanding the above, we acknowledge that declining foreign exchange rates will reduce the return to an investor.
The Australian federal and state governments continue to look to privatisations of financial services organisations as a way to fund capital (infrastructure) projects. The New South Wales government has announced plans to privatise Pillar Administration, the state owned superannuation administrator and StatePlus, the state-owned financial advisor with $15.9 billion of funds under management (at June 2015), during 2016.
This continues the trend from 2014 and 2015, which saw the privatisation (either through the capital markets or trade sale) of Medibank, Territory Insurance Office (in the Northern Territory) and the potential privatisation of the South Australian Motor Accident Commission.
Capital requirements for our banks
More specifically, we want to focus on what the Big 4 banks will do with their wealth and insurance divisions. We have heard a lot about changing capital rules, capital allocations and the low return-on-equity (or return-on-capital) achieved by the wealth and insurance businesses within the banks. Will others follow National Australia Bank’s (NAB) lead and divest of their life insurance operations? (NAB announced the sale of 80% of its life insurance business, MLC, to Nippon Life in October 2015).
We think this still has a way to play out. There is likely still an appetite from offshore insurers looking for unwanted insurance divisions within Australia’s banks to acquire and grow their presence in Australia. It appears that (part of) the universal banking model may be coming to an end in Australia, and the players are realising that these businesses are better run by institutions that specialise in these areas (insurance, asset management, etc.).
Regulatory changes – private health insurance
In July 2015, supervisory responsibilities for Australian private health insurers transferred to Australian Prudential Regulation Authority (APRA). During the initial transition phase, APRA has not made significant changes to the regulatory (and in particular, capital) requirements for private health insurers under its supervision.
Could 2016 see APRA move the private health insurers over to capital, solvency and prudential standards more in line with those used to supervise the broader insurance sector? Should this occur, it may trigger a wave of consolidation, potentially kicking off in 2016, among smaller private health insurers who may look for scale to offset potential capital increases or increases in regulatory and compliance costs.
Investment in fintech – disrupt or be disrupted
In 2015, many of Australia’s established financial institutions (NAB, First State Super, ME Bank and others) announced that they were establishing venture funds or investment pools to tap into the growing financial technology (fintech) sector. This is further supported by the Australian federal government who, as part of its ‘innovation’ agenda, wants to encourage investment in start-ups. Will 2016 be the year when these financial institutions begin to spend some of the capital committed to these venture funds by driving investment into, or buying out, some of these growing fintech players to complement their existing businesses?
These deals will likely be smaller (in terms of deal size and stakes acquired) but could be high in volume as the incumbents compete with each other for talent, platforms and distribution to gain a first mover advantage. In late December 2015, Auswide Bank announced a partnership with MoneyPlace, a peer-to-peer lender in which the bank acquired 20% of MoneyPlace and committed to lending $60 million to consumers through the platform over the next five years.