In this second article of our blog series, we take a look at the key dynamics and themes as well as our M&A expectations in the banking sector for the year 2022.
Further outbreaks of COVID-19, along with the Ukraine-Russia conflict, have increased macro-economic uncertainty, impacting bank valuations globally.
At a regional level, as of mid-June 2022 North American banks were trading at P/TBV equal to an average of 1.5x, ASPAC banks at 1.3x, and European banks at a significantly discounted average of P/TBV at 0.8x. Low valuations and profitability should continue to drive consolidation in the European market, as banks look to make deals to gain cost efficiencies and improve market standing.
The war in Ukraine is severely impacting the world economy, in the form of economic slowdown, inflationary pressures, disruptions to supply chain and logistics and heightened cybersecurity risk. Compared to their peers in the US and ASPAC, European banks have a larger exposure to Russia, increasing their risk from the fall-out of sanctions. The uncertainties have started to impact the M&A landscape, resulting in a decline in the deal volume observed in 1H22.
As one would expect the dynamics and expectations vary regionally.
While larger deals in North America may struggle to gain regulatory approval in the US, activity in mid-tier and community banks should stay buoyant. In Europe further consolidation is expected, especially domestically, given the complexities associated with cross-border transactions. Larger local and regional banks are the driving force behind M&A in the ASPAC-region, through FDI and consolidation, to seek higher market returns or meet regulatory requirements.
Six major themes are likely to shape the banking M&A landscape in 2022:
- Acceleration to digitalization: Key drivers being displacement in traditional revenues due to tech enabled payment methods, growing competition from internet giants and neo banks, and a COVID-19 influenced shift to online banking.
- ESG becoming central: Deals will be viewed not just by book value, but by the target’s wider impact on people and the planet.
- Scaling operations: Banks will continue to seek deals that enhance franchise strength, expand products and services, business lines and technologies, and bring cost efficiencies.
- Wide universe of potential buyers: Encompassing PE, fintech, and conglomerates, all competing for targets.
- Asset quality: NPL sales are likely to continue in Europe and certain ASPAC countries/territories.
- Regulatory tailwinds/headwinds: In the US, large transactions are under the spotlight; ECB is becoming more vocal in supporting European banking consolidation; evolving regulations in ASPAC are also affecting deal-making.