Impact on M&A banking activity

After a period of record M&A activity over the past decade, the banking industry is now facing unprecedented disruption. M&A activity was down by approximately 21 percent (in terms of deal volume) in the Q1-20 (Jan- Mar) compared with that of the previous year. In terms of deal activity:

1. Some acquisitions and divestitures have still been completed, particularly those near to signing and/or closing, and some others have accelerated to overcome additional disruption from COVID-19
2. Some deals have been put on hold due to the high volatility in the financial market, as well as uncertainty over business resilience, while a few others have been canceled.

Within this context, we expect banking M&A activities to increase in the second half of the year, primarily driven by domestic consolidation aimed at improving bank efficiency and at creating larger scale in order to compete with international peers.

In addition, acquisition of fintech and digital solutions capabilities will have a key role in the M&A landscape to help banks re-design their business models in order to survive in the long run in a low interest environment.

Domestic consolidation is likely to pick up pace with the objective of increased operating efficiency at the national level in order to compete worldwide.

Troubled banks may face rescue, restructurings and nationalizations deals as governments/central banks inject liquidity.

Banks with high exposure to stressed industries (hotels, restaurants, travel, oil & gas, etc.) are likely to face an increase in NPLs and a worsening of the asset quality. This could serve as potential opportunity for asset management  companies and PE investors.

Distressed valuation in the banking space may represent a good entry point for some PE firms that are currently evaluating areas to invest their liquidity.

As funding sources dry up, struggling fintech firms with limited market experience (especially online lenders) may be forced to seek collaboration or acquisition by traditional financial institutions and PE funds.

There could be several opportunities for distressed investors given the deep discount that financial institutions are facing in the stock market. Moreover, buyers having surplus funds could take advantage of low prices in the current scenario.

Specialty finance and challenger-banks are the new business model with a strong potential for superior profitability; this new banking model is likely to get the opportunity to acquire market shares in the lending space and could be involved in potential M&A transactions.

COVID-19 represents an opportunity to foster greater use of digital capabilities. Fintech and digital solution players, such as payments solutions and instant lending companies, are likely to get involved in M&A transactions with traditional banks to increase their operational efficiency.