Global Corporate Divestment Study
Financial services watch
Drivers of divestments in the financial services industry
Financial institutions have executed a wave of divestments in recent years to raise capital to meet their capital requirements. Leading players have chosen to divest their non-core or under-performing businesses while refocusing on their more profitable and faster-growing units. Those that have divested non-core and less profitable business units have managed to remain competitive in their sectors and are now looking for growth opportunities.
“Post implementation of many regulatory changes and with a substantial pipeline of further changes to come, most financial services companies have had to change, re-optimize their business model, and recognize implicitly that the sum of the parts of the business pre-2008 has fundamentally changed going forwards. Portfolio review and re-calibration has therefore become a core competency in financial services for best in class players.” — David Barker, EMEIA Financial Services Transaction Advisory Services Leader
This trend toward divesting a business to raise capital has been the main rationale for divestments in the financial services sector, with 43% of the respondents identifying it as the main factor. Reduced growth outlook in the sector where the to-be divested business operates is cited as the second most important factor and a greater driver for banks than insurers and wealth and asset managers.
Q: What has been the most important driver within your sector when considering businesses for divestment?
Divestments of portfolios of customer contracts are expected to dominate financial services divestments in the near term
For banks with non-core loan portfolios, a strategic framework is critical, as is managing data quality for successful loan portfolio divestments. Eighty percent of the bank respondents have such a framework. However, implementing such frameworks can be challenging with many competing objectives.
The most important factor for banks to optimize was resoundingly managing the profit and loss account impact. Seventy-eight percent cited it among the top three criteria. This suggests that profits continue to be a scarce resource and are limiting factor in loan transaction markets.
Changing solvency rules has encouraged insurers to focus on their levels of capital. While the large insurance firms have been under less pressure than their banking counterparts, the need to raise and optimize capital has prompted a focus on capital allocation and lead to decisions to divest closed and run off books. However complexity is the most significant barrier to such divestments.
Advanced planning for complexities in the business structure helps to understand potential separation issues at the portfolio review stage and shorten divestment timelines
Regulatory approvals and clearances is one of the major tasks companies need to complete between the announcement of the deal and the closing.
It is therefore important to know the regulatory requirements and have a structured framework and procedures in place which can be followed for all divestments and acquisitions. Regulators are demanding the completion of detailed operational separation plans documenting the key operational risks to the separation and how those will be mitigated during transition.
Other critical factors in successful financial services divestments are establishing a new corporate structure and the impact of IT separation. Also, spanning all of these factors is unravelling the current nature of intra-group service provision and then defining the new service relationships that will be in place post-closing.
Q: What were the main factors behind the length of time taken between signing and closing?