The banking sector has had to navigate a variety of challenges, particularly during the past 12 months or so as the impact of macroeconomic uncertainties and interest rate increases have been felt.
The collapse of Silicon Valley Bank and Signature Bank in the US, together with the emergency takeover of Credit Suisse, put a spotlight on the global financial system and the banking institutions within it, and showed the velocity at which an absence of confidence in an institution, or the wider system, can have fatal consequences.
No wonder the Prudential Regulatory Authority, the UK regulatory body responsible for the supervision of banks, told firms back in January to be ready for a prolonged period of stress.
The M&A landscape for 2023 and beyond remains full of opportunity.This wider context has had an impact on mergers and acquisitions in the sector, and during 2022 there was a deceleration in activity.
However, the M&A landscape for 2023 and beyond remains full of opportunity for those able to finance and execute transactions, even if banking sector M&A may, in the short term, continue to be conservative in terms of deal volume by comparison to other sectors.
The necessary focus on the broader structural changes needed across the sector such as improving the use of new technology, as well as the regulatory focus on financial resilience and capital and liquidity positions, are likely to create M&A opportunities.
We expect to see banks looking to dispose of non-core assets or portfolios, or divisions that no longer fit into their strategy.
These opportunities are likely to be of interest to private equity in particular, who have reserves to deploy and will be hoping the slightly slower M&A market provides opportunities to transact at lower valuations.
Looking at disruptors
In the other direction, institutions with a desire to diversify their offering or improve the use of new technology will inevitably look at acquisition opportunities, particularly fintech companies that, in some instances, in the face of rising costs or difficulties raising further funding, may be attracted by the scale opportunities and large, readily accessible customer base at well-established institutions.
The opportunity for disruption in the financial services industry, and the banking sector in particular, has been talked up for a number of years and there have been lots of successful examples.
This appetite to disrupt continues to create significant M&A opportunity – there is a large pool of potential disruptors that might be an attractive investment proposition for well-established banks.
It is unlikely the sector will be flooded by new foreign entrants.These opportunities can enable banks to invest in ready-made digital solutions for the future that will support their evolution as they change to meet customer demands and address competition from new entrants.
There has been a growing trend of minority investments from, or partnership arrangements with, well-established banking institutions (such as the minority investments by HSBC in Monese and Lloyds in Moneyhub) and this trend is expected to continue.
Given the prevailing market conditions, consolidation and distressed M&A remains another area of possible activity, which may involve consolidation amongst firms who need greater scale to achieve their strategy, acquisitions of firms that need to restructure or banks divesting of non-performing loans.
M&A will continue to provide a route into the UK market for overseas financial services firms – demonstrated by the recent acquisition of Birmingham Bank by Better, the US-based digital home ownership platform.
There is a large pool of potential disruptors that might be an attractive investment proposition for well-established banks.Favourable exchange rates, a shared language, a transparent legal and regulatory environment, attractive tax rates, the availability of finance and talent, and an openness to foreign investment are some of the reasons that US investors are attracted to the UK.
However, while overseas investors and firms will continue to be interested in UK banking M&A opportunities, it is unlikely the sector will be flooded by new foreign entrants.
The assessment of the suitability of any person or entity as a controller of an authorised firm means the FCA and the PRA are (rightly) able to ensure that M&A is not a backdoor into ownership of a UK financial institution.
Over the past 12 months or so transactions have taken longer – as acquirers ensure detailed diligence is carried out, and the regulator takes the time available to assess the suitability of potential controllers – and in some instances have required additional complexity as parties look to advisers to ensure the increasingly unpredictable 'what if?' scenarios are catered for.
But the landscape for M&A in the banking sector remains positive and M&A will continue to play its part in the evolution of the sector.
Philip Barratt is a partner in the corporate team at law firm TLT
