Financial services M&A predictions in 2017
Our view on the topics financial services M&A professionals, financial institution executives and advisors will be considering as we begin 2017.
On the back of our first Australian financial services M&A predictions in 2016, we’ve come back for more, to highlight some of the topics which will likely be on the minds of M&A professionals, financial institution executives and advisors as we begin 2017.
A quick recap of our predictions from 2016 suggests we were on or around the mark, with Government privatisations and bank capital requirements coming through during 2016. There is a recurring theme this year around foreign exchange rates, bank divestments and fintech with the overarching global uncertainty surrounding the election of Donald J. Trump in the US and the UK’s approach to Brexit.
The chart below summarises deal value and volume for the past three calendar years. The obvious insight is that, while deal volume has remained steady (c.40 financial services (FSI) M&A transactions a year) the deal value has fallen significantly from its 2015 peak (which was driven by GE Capital’s exit from Australia and some large real estate transactions).
Based on the number of deals announced already in 2017 (at the time of writing in early-January we already had 3 major announcements) it appears we are on track to meet or exceed the historical averages for FSI M&A. Music to the ears of financial services M&A bankers and advisors.
As such, we’ve set out some of our predictions (some with a stronger basis than others) for the topics on the minds of financial services M&A market participants as 2017 gets underway.
1. Global Uncertainty – The UK referendum to leave the EU in June 2016 created uncertainty amongst global markets and shook investor confidence, with a significant number of M&A deals either put on hold or scrapped altogether in 2016. Whilst the timeframe and economic implications of Brexit remain unclear and the outcome of upcoming elections in France and Germany look far from certain, investor sentiment for cross-border M&A activity with Europe may be muted in 2017.
Meanwhile, the result of the US election in November may be a positive for Australian M&A, with the President-elect having announced a number of “pro-business” policies. However, large cross-border deals exposed to the US and China may be held up whilst uncertainty reigns about whether Donald J. Trump will follow through on withdrawing from the Trans Pacific Partnership (TPP) (which is highly anticipated) and his protectionist trade policies levelled at China.
As set out in the chart below, there has been a rally in the Dow Jones Industrial Average (DJIA) since the US election. Many have attributed this to Donald J. Trump’s pro-business rhetoric, anticipated tax reform/corporate tax cuts and the GOP controlling both houses of the US Government likely giving rise to a more pro-business agenda.
Will the global uncertainty restrict the appetite of foreign investors for M&A activity or will there be an uptick in investment, with Australia – in particular the financial services industry – seen as a safe, low-risk economy.
2. Australian Dollar – The average AUD:USD exchange rate since January 2016 of 0.7439 represents a marginal depreciation on the 2015 average of 0.7525, meaning that Australian assets have remained relatively cheap for foreign investors. Recent examples of inbound M&A activity from North America the US includes the acquisition of GE Capital’s Australian and New Zealand Consumer Finance business by KKR, Varde and Deutsche Bank, GE Capital’s Australian and New Zealand Commercial Distribution Finance business by Wells Fargo and the acquisition of Pillar Administration by Mercer.
With an expected rise in US interest rates in December, the Australian Dollar may fall further into 2017, increasing the attractiveness of Australian assets. An appreciation in the Australian dollar would of course have the opposite effect, and an increase in financial inflows from China (if Chinese trade is diverted away from the US following the application of punitive tariffs) could provide the catalyst for a strengthening currency.
3. Bank divestments – Following our comments in last year’s FSI M&A predictions around banks using divestments to raise capital, there was a lot of chatter in the market around ANZ divesting of their wealth business. While that business is still to come to market, ANZ did put its share trading business (ANZ Share Investing, formerly E*Trade Australia) and UDC Finance, it’s New Zealand based asset finance business on the market.
2017 is expected to see a continuation of bank divestments, as the big 4 banks focus on their core Australian banking franchises. ANZ announced the sale of its 20% stake in Shanghai Rural Commercial Bank on 3 Jan 2017, and the sale of UDC Finance was announced on 11 Jan 2017. ANZ’s CEO Shayne Elliott noted that the bank is looking to divest ANZ’s Wealth business, which is expected to come to market in early 2017.
On the back of bank divestments by competitors in 2015 and 2016, there is also potential speculation that the other big 4 banks could follow suit in similar areas of business and product suites.
4. Increased private equity participation in the financial services sector – as illustrated by the number of rumoured bidders and successful acquisitions completed by private equity investors (PEI) in recent years.
While the financial services sector has not historically been a significant sector for private equity buyouts, certain funds are finding opportunities in regulated and unregulated parts of the market. Significant examples include the buyout of GE Capital’s Australian and New Zealand Consumer Finance business by KKR, Varde and Deutsche Bank and TA Associates backing the management buyout of Goldman Sachs Asset Management.
The chart below sets out a snapshot of private equity (or private equity backed) transactions over the past three financial years, growing from two in 2014 to five in both 2015 and 2016.
Given the uptick in private equity interest in the past two calendar years, we anticipate this to remain steady or grow in 2017.
5. Technology – We are anticipating 2017 to be a significant year for financial technology (fintech) in Australia, likely giving rise to M&A opportunities in the sector. The New Payments Platform (NPP), which is due to launch in the second half of the year, will enable faster, near real-time payments on a 24/7 basis, and financial institutions will need to ensure that their systems are up to speed to cope with customers’ demands for instant payments. Non-founding members will only be able to access the NPP through commercial agreements with existing members, and it is unclear how or when they will be given direct access. Will we see non-ADI fintech start-ups and challenger banks being priced out of the market?
Blockchain continues to be developed and a report by IBM in September 2016 predicted that the technology will be used by 15% of big banks by 2017. In October 2016, ANZ and Wells Fargo successfully tested a shared distributed ledger platform, whilst CBA entered into the first global trade transaction between two independent banks via blockchain, also with Wells Fargo. It is likely that M&A will occur between blockchain participants, but likely smaller aqui-hire transactions given none of the blockchain players have significant scale at this stage.
Other areas of fintech are seeing strong M&A deal volumes and capital market activities (IPOs), particularly those in the wealth management sector. There are also a number of fintech’s expected to IPO in the coming 12-24 months across the payments, peer-to-peer lending and wealth management sectors. As the digitisation of the financial services industry continues into 2017, will we see an uptick in M&A activity in fintech businesses?
6. Cross border M&A – There has been an uptick in offshore buyers for financial institutions in Australia. The chart below illustrates the number of cross-border transactions announced between 2014-2016 by region of the buyer.
As demonstrated above, there is a steady inflow of funds / constituent number of buyers from North America however there has been an increase in buyers from Asia (particularly from China and Japan). It is expected that Australia will continue to see M&A deal inflows from China and Japan, as Chinese buyers look to expand their global presence with quality businesses and Japanese buyers look for growth in foreign markets such as Australia. Recent examples include HNA’s acquisition of ANZ’s UDC Finance, Nippon Life’s acquisition of 80% of MLC from NAB and Sony Life’s acquisition of 15% of listed life insurer and wealth manager, ClearView Wealth.
A large number of these acquisitions have been by repeat buyers, those who have entered the Australian market, and are consolidating other players in the market. This includes buyers such as Arthur J Gallagher (insurance), Henderson Group (wealth) and Zurich (insurance).
With the falling Australian dollar (against the USD) noted above we anticipate cross-border M&A in the financial service sector to continue and increase in 2017, with the major buyers expected to come from Asia (particularly China/HK and Japan) and North America. This is likely to be a combination of existing foreign players consolidating their position, but also potentially new players making significant acquisitions in Australia as a route to market entry, potentially buying some of the businesses being divested by the big 4 banks.