6 minute read 5 Apr 2019
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Financial services companies are strategically divesting to remain competitive


Charlie Alexander

EY Global Transaction Advisory Services Leader – Banking Capital Markets Sector

Experienced transaction leader across the Banking and Asset Management sectors. Strong believer in building long-term relationships by doing the right thing. Travel and sports fan. Father of three.

David Lambert

EY Global Insurance Transactions Leader

Helping clients to assess the merits of investing into, or divesting of, companies in the insurance sector.

6 minute read 5 Apr 2019

Divestments will help fund investment in the latest technology, streamline operating models and optimize portfolios.

inancial services companies – including banking, insurance, and wealth and asset management – are facing fundamental shifts in their business models. Strategic divestments will help fund investment in the latest technology, streamline operating models and optimize portfolios.

According to the EY Global Corporate Divestment Study, eighty-five percent say they plan to divest businesses, assets and portfolios within the next two years.

Divestment intentions


of financial services respondents say they plan to divest businesses, assets and portfolios within the next two years.

The financial services sector faces a collision of competitive, regulatory and technological headwinds.

  • First, revenue pressure is growing. Shifts toward more online and digital customer behavior, the explosive growth of new FinTech platforms and the rise of digitally-agile non-traditional competitors are ramping up the competition and eroding fee sources.
  • Second, cost pressure is rising. Customers want 24/7 frictionless access to financial services of every type, through channels of their own choosing. Businesses hoping to deepen their customer engagement and keep up with demand will need an end-to-end view of their clients, based on new tools and better data – all of which requires investment.

Divesting to compete in a technology-driven environment

Many businesses in the sector are hoping to address these challenges by accelerating their adoption of digital technologies, such as analytics, artificial intelligence, robo-advisors and blockchain.

The financial services sector is already active in divesting: 40% of companies have made between three and 10 major divestments over the past three years, compared with just 15% of firms across all sectors. The proportion of companies making divestments worth more than US$100m has also risen sharply: 84% say their last major divestment was worth more than US$100m, up from 61% last year.

Companies that have made between 3 to 10 major divestemt in last 3 years chart

In evaluating new technology-driven business models, financial services companies need to focus on changing value propositions and refocusing their management teams on new areas for growth.

Many companies in the sector are demonstrating more rigorous portfolio management, with a strategic approach to divesting.

  • Streamlining the operating model is a top divestment driver for financial services companies – 61% say it triggered their most recent divestment.
  • Seventy-three percent say a unit’s weak competitive position in the market was a divestment trigger. This may be due to a lack of continued investment or an asset that is no longer core to the business and is now better left in the hands of a new owner.
  • Forty-nine percent of financial services companies say their most recent major divestment was triggered by an unsolicited approach – suggesting that many buyers are continuing the hunt for quality assets with a sharp eye toward value creation opportunities.

However, while unplanned or opportunistic divestments may fulfill tactical goals, such as improving capital ratios, their full value may not be realized if they have not been properly prepared for the sales process.

Sector highlights: banking and capital markets, insurance and wealth and asset management 

  • Banking and capital markets

    Predicting more transformational deals

    Divestments are clearly seen as a lever for change. Nearly three-quarters of banking executives (74%) expect an increase in the number of large transformational deals in the sector over the next year, a sharp increase from last year (51%). The impetus for deals is growing: 83% expect to initiate their next divestment within the next two years, while 61% plan to divest in the next 12 months.

    This uptick in expectations for larger transformational deals comes at a time when the appetite for European banking consolidation is being revisited by both regulators and governments in order to compete against the larger US banks. At the same time, the long-expected consolidation across the US mid-market banking sector is taking place.

    Most large global banks are well advanced in their assessment of their “core vs. non-core” business unit strategies. While progress has been made to divest non-core assets, there are still some pockets of untapped divestment potential remaining, including those banks still holding onto wealth management and insurance businesses.

    There is also continued pressure from activist shareholders to reshape some of the largest banks. We expect activism to remain a key threat to the boards of banks. As a result, all banks should be clear on their transformation journey and how various business units fit into delivering appropriate shareholder value, as opposed to being divested to a third party who ascribes more value.

    Divesting to streamline operating models can help banks improve their cost base, reposition for digital growth and focus on greater efficiencies in the business. However, they may consider joint ventures or partnerships in order to capture some of these objectives without fully divesting a business. For example, one large European bank created a wealth management joint venture with a traditional fund manager as part of a multi-pronged deal, allowing it to retain economic interests while achieving scale through the partnership.

    Private equity, in particular, is expected to be an active buyer of banking sector businesses and assets. They have become increasingly capable of buying banks from both a risk appetite and sector understanding perspective. It is critical when selling banking sector businesses that sellers consider both strategic and financial buyers. Sellers will need a management team that understands the financials and is well versed in the projected forecast. The management team will also need to be able to execute on a value creation story to build the digital and technologically enabled bank of the future and help buyers see the future vision for the business outside of its banking parent.

  • Insurance

    Divesting to reinvest in architecture and operations

    Streamlining portfolios is a major theme for insurance businesses, with 87% planning to divest within the next two years, 75% of whom say within the next 12 months. Meanwhile, 80% expect to see an increase in the number of technology-driven divestments over the next year, up from 61% last year.

    In this context, technology-driven divestments relate, in particular, to divesting of complex operations that are dependent upon “old technology” and refocusing capital on future capabilities and more streamlined and cost-effective systems. The complexity of the legacy insurance systems is a major barrier to achieving transformational change in capability and cost effectiveness. As insurers position for the future, they are divesting legacy businesses that are anticipated to fall below return on equity targets either due to high operating costs or ongoing high capital (including investment) requirements, or due to a combination of both. 

    Insurers are putting the proceeds of asset sales to good use. Nearly three-quarters (72%) plowed funds from their most recent divestment back into their core business, ahead of their peers elsewhere in the financial services sector.

    Insurers are also pursuing new forms of joint ventures or partnerships as part of the sector transformation journey. For example, new ecosystems are developing across a host of areas, including health care and wellness. At the same time, emerging customer groups such as small and mid-sized technology startups, are starting to require new types of insurance products.

    As large and small insurance groups look to redefine their capacity, footprint and capabilities, they must also consider the value story of the businesses they plan to divest. Could an IPO or spin-off be the optimal deal structure? What innovation has been developed that fits into the value story for potential buyers? What synergies can be articulated to different pools of buyers? Insurers should test different scenarios for the business and get to a decision point on each.

  • Wealth and asset management

    Will market headwinds change the pace of divestment?

    Wealth and asset management (WAM) firms have historically been most associated with divestments where they have been subject to sale by a bank or insurer parent company or via a sale of founding shareholders. There are fewer examples of divestment of parts of a WAM business – these have typically been seen in the private banking sector where global firms have exited selected markets for risk or profitability reasons.

    Riding out current market volatility is an immediate challenge for the WAM sector. Firm valuations are highly sensitive to changes to current and projected assets-under-management (AUM) levels that can be impacted by both capital market levels and net flows, the latter showing positive correlation with trends in the market. There are headwinds to firm profitability from fee compression. They are caused by a shift to passively managed assets, increased transparency of costs and charges, and a big shift in investor preferences away from core actively managed product toward alternatives and other higher cost specialist strategies that have driven a need to adapt. This has been compounded by the ongoing costs of technology investment and regulatory change.

    In 2018, these factors combined to decrease AUM and the industry profit pool and drove a downward rerating of the sector. Generally, firm valuations decreased about 25% or considerably more where firm-specific factors contributed.

    There is strength in scale: large businesses that can achieve economies of scale across investment categories, distribution and the firm’s fixed infrastructure are better placed to withstand ongoing margin pressures and choppy waters.

    It could be a rougher ride for medium and smaller-sized asset management businesses unless they are focused, disciplined and add significant value to their client’s investment process. These players may seek mergers with peers or with a larger global player. While sector valuations have in general decreased from peak levels, successful niche firms with an attractive investment product still command a premium.

    WAM firms may consider different divestment strategies to support large investments around technology and data for further digitalization of their businesses. IPOs may be evaluated for their ability to raise capital, but in other areas joint ventures are supporting cross-sector collaborations within financial services (e.g., between banks and AMs in the wealth sector). Others may look to optimize distribution, or the middle and back office, through outsourcing or by sale to a larger multi-boutique platform.

    The study indicates wealth and asset management companies are more receptive to unsolicited bids than their peers: 58% say an unsolicited approach was a trigger in their most recent major divestment, compared with 53% in the insurance sector and 37% in banking. Wealth and asset management businesses are more likely to be candidates for divestment if they are a captive in a bank or insurer.

Disentangling to increase divestment value

Operational complexity in executing carve-out sales in the financial services sector remains a common theme.

Financial services companies may underestimate how lack of preparation can impact their timeline for complex carve-outs. More than half (52%) of financial services companies say lack of understanding around work stream interdependencies – and the critical path to disentangle them – derailed or delayed their last carve-out. Mapping out entanglement issues early and creating an ongoing dialogue between cross-functional teams drives value in terms of timing and net proceeds.

Access to more detailed data can help sellers define work-stream interdependencies more clearly – cited as a challenge by more than half (53%) when developing the deal perimeter. A similar percentage (52%) also say that lack of understanding around work streams delayed or derailed a closing.

The challenges of disentangling an asset from its parent should not be underestimated. For example, a major bank spent hundreds of millions of dollars building IT for a carve-out that ultimately did not take place.

Analytics plays a pivotal role: 76% of sellers say they tapped into analytics to understand the true value of a non-core business and whether to exit during their most recent divestment. This can include everything from customer cross-sell to branch performance, deeper loan portfolio analytics, sales team effectiveness and actual usage of head office allocations.

Using analytics


of sellers say they tapped into analytics to understand the true value of a non-core business and whether to exit during their most recent divestment.

Maintaining competitive tension to capture the best price

In financial services, many sellers already have a preferred suitor in mind, while others expect to see greater activity among PE buyers.

Running an auction process can help determine whether an offer is reasonable. Most companies involved in an opportunistic divestment opted for more bids: 67% of financial services companies say they opened up the selling process to another buyer to determine whether the price being offered was reasonable, while 63% went a step further and ran a competitive auction process.

Meanwhile, 60% of financial services sellers use internal and independent due diligence to test the price, a slightly lower proportion than their peers across all sectors. We have noted anecdotally that financial services companies that commission sell-side due diligence support complete their deals more consistently than those that take a less structured approach.

Sellers should have a clean set of data providing a robust, sensible and pragmatic set of projections for the sale, grounded in a defendable set of historical pro forma numbers. This includes stress-testing data from a buyer’s perspective during negotiations. Most financial services sellers (56%) did not do this during their last deal, but wish they had.


Financial services companies are entering the next phase of divestments as strategic sellers rather than as forced sellers. They are stepping up their use of divestments to refocus and streamline their operations and prepare their businesses for a digital and technologically enabled future. However, the sector urgently needs to address tactical and strategic gaps if it is to get the most out of divestment opportunities.

  • Own the strategy and the process. Whether a divestment is solicited or unsolicited, value creation hinges on the seller owning both the strategy and the process. This means working proactively at every stage, with a focus on sell-side diligence and a firm grip on every facet of the carve-out, from defining the optimal deal structure and perimeter to a clear path for operational separation.
  • Prepare for rapid transformation with rigorous portfolio reviews. Financial services companies that can move quickest toward the next operating model with scale will emerge as winners. They will be the companies that have built cost-effective, scalable platforms and that are utilizing the advantages of technology such as AI, robotics, big data, digital interfaces across both their internal and external environments. Some of this change will be achieved through acquisitions and some through joint ventures and alliances with other players in the ecosystem.
  • Focus on the role of data in divestment execution. Improving access to quality data and extending its use through analytics will enhance the speed of decision-making and increase overall divestment value when planning and executing carve-outs.
  • Stress test your valuation from a buyer’s perspective. Sellers must be clear about their value story. They need to understand and crisply articulate historical and projected value creation for each prospective buyer while maintaining discipline with solid sell-side diligence. Doing so will help maintain competitive tension among the pool of potential buyers.


The EY Global Corporate Divestment Study focuses on how companies should approach portfolio strategy, improve divestment execution and future-proof their remaining business.

About this article


Charlie Alexander

EY Global Transaction Advisory Services Leader – Banking Capital Markets Sector

Experienced transaction leader across the Banking and Asset Management sectors. Strong believer in building long-term relationships by doing the right thing. Travel and sports fan. Father of three.

David Lambert

EY Global Insurance Transactions Leader

Helping clients to assess the merits of investing into, or divesting of, companies in the insurance sector.