5 minute read 18 May 2021
Observatory antenna in the sunset

Banks demonstrate an appetite for M&A and transformation

By Jan Bellens

EY Global Banking & Capital Markets Sector Leader

Passionate leader on innovation in financial services, especially in emerging markets. Global citizen. Keen traveler.

5 minute read 18 May 2021

Transformation tops the agenda, but strategic reviews may be driven more by tactical thinking than purposeful transformation.

In brief
  • Banking executives believe they performed well despite the pressures of the pandemic, but for some, key areas of weakness in their operating model emerged.
  • Banks are looking to transform their operating models and costs, but short-term thinking may hamper long-term value creation. 
  • M&A gives banks a real opportunity to acquire growth in a challenging market, strengthen resilience and buy capabilities that will help transform the business.

Banking and capital markets firms have been under considerable pressure during the COVID-19 pandemic. According to the latest EY Global Capital Confidence Barometer (pdf), the impact of lockdowns and a slowdown in the world economy have had a negative impact on revenue and profitability for more than 90% of banks. And while many banks generally have been able to respond well to the pressure of the pandemic, the crisis has highlighted key areas of weakness in some banks’ operating model.

Lessons from 2020 serve as a catalyst for transformation

Overall, 65% of banking executives say their company outperformed peers on digital transformation, as banks accelerated their digital investments to meet and capitalize on heightened levels of customer digital adoption. Meanwhile, with banks supporting their retail and wholesale customers through periods of financial difficulty, strengthening their connections with the communities in which they operate, 54% say they outperformed in engaging with communities and society.

Pandemic performance


of banking executives say their company outperformed on digital transformation.

However, some banks have found that legacy technology or processes, or those of their suppliers and partners, have struggled to flex and adapt to accelerated digital needs, such as remote working, during the pandemic. Eighty-five percent of banks say their organization is currently undergoing a significant business or technology transformation program, with nearly a quarter indicating the triggering factor was the pandemic.

In response, banking executives are being bold and forward-looking as they make plans to increase investment across the organization, with 69% saying they plan to boost their investment in digital transformation, 64% are looking to pour more into customer engagement, and 61% want to put more energy and money into identifying, evaluating and responding to emerging risks in real time. 

Of course, these initiatives are taking place in a climate of uncertainty that has 86% of banking executives delaying or stopping planned investments as a result of ongoing geopolitical challenges. This uncertainty is unlikely to diminish anytime soon. As such, agility will need to be central to successful transformation.

Banks look to seize the opportunities amid disruption … but are they being strategic or tactical?

In addition to serving their clients and supporting their people, banking executives see the pandemic as an opportunity to reimagine their business models, both to future-proof the business and to drive growth. Nearly all (93%) of banking respondents say their organization conducted a comprehensive strategic and portfolio review in 2020. 

Banks clearly recognize the importance of a streamlined business model that genuinely creates value for their clients and improves profitability. Half of bank executives say they are looking to divest or exit underperforming products or services as part of their digital transformation initiatives.

However, banks may want to be asking a fundamental question: does my strategic review translate into strategy-driven transformation? 

Only 37% of banks surveyed say that their transformation programs are being driven by the need to redefine purpose or strategic objectives, or by changes in the business ecosystem. The remainder cite short-term drivers of transformation, such as the pandemic, geopolitics or cost reduction. Further, of those driven by changes to the ecosystem, the vast majority (95%) say they need to define their future role in the ecosystem and 90% say their organization needs new skills and processes to operate effectively in an ecosystem. This will be a key area of focus for those wishing to be best positioned during and post-COVID-19 recovery.

More evidence that banking executives are thinking more tactically than strategically appears in the 65% who say that delivering cost reduction is a key priority of their transformation program, vs. 49% who are focused on a flexible operating model and cost base and 41% who want to create a more scalable operating model. To put this approach in perspective, the largest 200 banks would need to cut costs by approximately US$250b to deliver an average 10% return on equity. The hard truth is that cost reduction alone is unlikely to deliver the long-term shift in performance that banks are looking for. Rather, flexibility and agility will be key to seizing opportunities during the recovery period and capturing the upswing.

Business and digital transformation


of banking executives say delivering cost reduction is their top priority for transformation, vs. 49% who want to create a more flexible operating model.

M&A can help banks accelerate transformation 

Just as banks are considering divestments of non-core assets to streamline their business models, executives are thinking about M&A to drive scale and accelerate transformation, with 66% (vs. 49% of global respondents) saying they plan to actively pursue M&A in the next 12 months. This is the strongest M&A appetite seen in banking and capital markets in the last 10 years. Nearly half (48%) are looking for assets that will enhance existing operational capabilities, while 29% are contemplating a transformative deal that could reshape the organization.

Banking capital markets mergers acquisitions

Strong appetite from private equity (PE) will increase competition for assets. The profitability challenge banks face, and the transformation required in the sector, are making the sector more attractive to PE firms. 

Bank executives need to pivot their short-term thinking to long-term value creation

The story to date in response to the pandemic has been more about short-term thinking to demonstrate financial resilience. For banks, the future story will need to be more about operating model agility and flexibility, and ecosystem collaboration. Banking executives will need to take a future-back approach to strategic planning if they want to create value for the long term, especially given the sustained low-interest-rate environment is expected to continue. 

The good news is that many banks are more prepared than they were even a few years ago to build more agile, future-ready organizations, not least given the positive impact that operating through the pandemic has had on progress in the digital agenda and engagement with customers. The focus on underperforming assets and products will also help free up capacity and ensure that investment is going to the right parts of the business. This also means that banks looking to grow in those segments will have the acquisition targets they are looking for to help accelerate their COVID-19 recovery and their transformation agendas.

In the near term, this may mean banks taking steps to free up capital to invest in transformation at a point of stress in the cycle. When there is more breathing space from the investor community, banks can then pursue more radical approaches so that they are well-positioned for success in an upswing.


The EY Global Capital Confidence Barometer (pdf) gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.

About this article

By Jan Bellens

EY Global Banking & Capital Markets Sector Leader

Passionate leader on innovation in financial services, especially in emerging markets. Global citizen. Keen traveler.