Focus on digitization     |     Low profitability     |     Challenged earnings     |     Portfolio transitioning     |     Asset Quality deterioration     |     Encouraging regulations

At a global level, banking consolidation theme would remain, while we also expect other integrals drivers such as digitalization, low profitability concerns, push towards sustainable finance, challenged earnings, asset quality issues and regulatory intervention to reshape the banking deal landscape in 2021. Though all themes may not be prevalent for all geographies, however, these may be potential topics of discussion in board rooms of many banks.

Digitally engaged clients could limit the value of branches

A critical driver for deal activity in 2021 will be heightened digital engagement with customers decreasing the need for physical branches. Globally, banks are likely to place more capital investment in buying new technology and digitization.

  • As per a report by Kearney, 25 percent or 40,000 bank branches will close across Europe in the next three years as the COVID-19 pandemic drives the uptake of digital banking1.
  • A leading German bank announced in September 2020, the closure of 100 branches in domestic market — optimizing domestic distribution channels and adapting to the new ways in which customers are interacting with the bank2.

Potential impact: Better valuation multiples of digital-savvy banks compared to traditional incumbents is another force driving digital engagements, forcing banks to infuse digital into their M&A strategy. The next wave of bank consolidation has already set-in especially in Europe. We expect progressive banks to focus on acquiring digital capabilities like AI and advanced analytics. to improve their target screening process, and build interactive customer experience dashboards.

Low profitability — organic capital generation is too low

Another key driver is the ability to generate organic capital while managing overall share count. In response to COVID-19, capital preservation has become critical and profit retention alone may not be enough. With increased impairments and even with cessation of dividend payments, it would be a challenge for banks to restore their capital ratio targets amid the prevailing uncertainty.

Potential impact: This would pave the way for banks to explore other radical options such as asset and liability restructuring, new capital issuance, and the sale or closure of portfolios and businesses which may accelerate deal activity in 2021.

Deposits and credit on divergent paths challenging earnings

Banks are in better shape in terms of capital and liquidity than during the global financial crisis. But earnings remain an on-going concern. Most global banks are seeing deposits flooding in the absence of loan demand (low consumer spending and utilization from small businesses); a lack of attractive yield opportunities will continue to put pressure on net interest margins3,4.

As per the ECB total deposits held by Eurozone banks rose 10.3 percent5 in the year to July 2020 (climbing above €12 trillion). According to FDIC data, US$2 trillion6 surge was seen in deposit accounts of US banks since January 2020.

The governments of various countries also unleashed funds to bolster small businesses and individuals via stimulus packages and unemployment benefits such as the MSME guarantee program and the unlimited bond-buying program.

Potential impact: Surplus liquidity is weighing on margins and forcing several banking institutions to pursue deals to help drive higher earnings.

  • Banks are also scaling back from leveraged loan exposure as credit risk tied to them remains elevated.
  • Many banks have increased their loan loss provisions but the actual impact of — COVID-19 on corporate and consumer lending is still largely unknown.

This all in-turn could encourage many bank boards to include M&A in future strategic actions as they struggle to grow earnings.

Sustainable finance — towards portfolio transitioning7,8

Global banks are increasingly embedding environmental, social and governance (ESG) into their risk-management frameworks. As the M&A landscape starts to normalize, we expect sustainability-related M&A to open new potential revenue opportunities for the banking sector. As noted by a research paper9, exposure of European banks toward corporates with non-ESG models (particularly in sectors such as real estate, transport and brown sectors) broadly range from 5 to 10 percent, implying that lending is not concentrated in sectors which are vulnerable to climate risk.

Potential impact: Banks are likely to substitute existing business portfolios, though such portfolio transitions might take long especially for those heavily reliant on environmentally unfriendly sectors like mining. Longer term, the trend is expected to drive a 3-4 percent incremental ROE difference. Banks with asset management units can also see a substantial increase in sustainably managed assets over the next five years. It may not bring a major change in fees but would attract net new money. Climate risk-related disclosure by banks could also be a potential catalyst for further change.

Asset Quality — early signs of deterioration; more defaults to materialize in 2021

Europe: Asset quality deterioration showed early signs; however, a significant impact has not emerged thanks to the loan moratoria, furlough schemes and other state support, in European markets. Despite COVID-19, investor fund-raising activity has not slowed. Due to unprecedented intervention by authorities and governments, ultimate transaction activity may decline but valuations may not fall as fast or as far as in previous crises.

Asia-Pacific: Several measures have been undertaken such as liquidity injections, special loans to affected industries and regions, and policy rate cuts by Asia- Pacific governments, central banks, and supervisory authorities to address the ramifications of COVID-19, including support for banks to provide forbearance. We estimate that Asia-Pacific in 2021 will be hit with additional nonperforming assets.


  • France, Spain, Greece, Italy and Cyprus are expected to see an increase in NPL-related deal activity, but, in all countries, it will be harder to spot the mega-deals of past years.
  • Buyout fundraising in the region will be stronger than many expected. Investors appear positive about future returns in anticipation of pricing adjustments.
  • For 2021, we expect an increase in sub- performing markets (UTPs in Italy) and the secondary market, while secured NPLs are facing a slowdown in the next few months.
  • In China, with most listed banks compliant with regulatory requirements and their CET1 ratios stable over the past few years, we expect such banks to withstand the risks as well as provision levels arising out of COVID-19. These banks have boosted their loan-loss provisions throughout the year as the authorities urged them to step up their efforts in lending to troubled sectors. Banks have also allowed specific borrowers to delay interest and principal payments to March 2021. As the Chinese economy is staging a rebound, we expect banks’ bad loan ratio to stabilize in the next two quarters considering moratorium from the lender’s side and improved liquidity from the borrower’s side, but loans overdue may increase in 2Q21 when the payment holiday expires. Foreign distressed debt investors, often called vulture funds or special situations funds, are likely to tap this opportunity. Other markets which are expected to see large volumes of NPLs and a surge in deal activity are those found in development countries such as India, Indonesia, and Thailand etc. where they have more sector concentration such as tourism.

Regulations — M&A under consideration

In the US, the Justice Department reconsidering its antitrust review process9 (revamping the 1995 Bank Merger Guidelines) provides an impetus to more M&A activity among community banks.

In July 2020, the ECB10 launched a new supervisory approach to promote further bank consolidation. The guidelines largely focus on the use of supervisory tools to facilitate sustainable consolidation projects and recognition of badwill to increase sustainability of business models.

Governments in several ASEAN countries such as Indonesia, Vietnam, and Myanmar are focusing on liberalizing and increasing foreign participation in their respective countries.

Potential impact:

  • In the US, revamping of merger guidelines is expected to benefit small and mid-size bank M&A deals by identifying transactions that are likely to decrease competition and create a post-merger monopoly.
  •  In Europe, the consolidation wave is expected to strengthen. Some of the largest banks are currently discussing potential mergers while big deals are happening.
  • In Myanmar, foreign banks anticipate being able to secure a license to engage in onshore retail business through a subsidiary or joint venture. In Thailand, commercial and representative bank offices were removed from the list of restricted businesses needing a foreign business license.