Global financial services transaction monitor

Overview of global financial services deal activity, H1 2013

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Global financial services transaction activity remained subdued in H1 2013, with both deal volume and value at their lowest levels since our analysis began in H1 2010.Transaction volume declined by 5.4%.

However, total disclosed deal value decreased significantly by 27% compared to H1 2012. Merger and acquisition (M&A) activity in the banking and capital markets sector recorded a sharp decline in deal volume across the Middle East and Africa, Latin America and Asia-Pacific when compared to H1 2012. Only Eastern Europe exhibited significant improvement in deal volume.

A mixed picture emerged for transaction activity in the insurance sector. Deal volume improved in Western Europe, North America and Asia Pacific, but recorded significant drops in Middle East and Africa, Latin America and Eastern Europe.

Global asset management M&A activity increased in terms of volume compared to H1 2012, with the exception of the Middle East and Africa and Asia-Pacific. This trend reflects the scarcity of scale and suitable targets in Asia-Pacific and the Middle East and Africa, rather than a lack of inbound interest in these regions.

The combined deal value of the ten largest financial transactions commanded a 35% share of the total disclosed deal value of financial services transactions.

Half of the largest financial services transactions in H1 2013 were originated in Europe, with government intervention, bank restructuring and non-core disposals remaining as the key M&A themes in the European financial services sector.

Only half of the largest financial services transactions involved targets in the banking and capital markets sector in H1 2013. This is in sharp contrast with H1 2012, when all ten of the largest financial services transactions involved targets in the banking and capital markets sector.

Volume and value trend

EY - Volume and value trend

Key findings

1. Transaction activity continued to decline, with both deal volumes and disclosed value at their lowest level since our analysis began in 2010.

2. In 2012, we saw a number of government-led bank rescues and significant European Union (EU) mandated disposals of noncore assets. While in H1 2013, we have seen some activity sparked by government intervention, these “mega deals” in banking have largely disappeared.

3. Investment into high-growth markets remains a key theme, with Eastern Europe and Latin America attracting inbound transaction flows of US$2.7b and US$2.4b respectively in H1 2013.

4. North American investors emerged as the biggest outbound investors, with Western Europe being their favored destination.

5. Results from EY’s Capital Confidence Barometer show tempered optimism, as narrowing valuation gaps and improved confidence in the deal-making environment may provide a springboard for future activity.

Looking ahead

The global economy is expected to expand moderately, with divergence in the pace of growth between developed and emerging markets. Developed economies will continue to face headwinds from fiscal consolidation, weaker domestic demand and protracted recession in the Eurozone. However, emerging markets are in a much better position to benefit from the improved macro environment.

Impact on global financial services transactions
Recovery in the broader economy should give investors some confidence to return to transaction activity. However, our optimism is tempered as most of the recent deals were driven by regulatory obligations, and the majority of restructuring-driven transactions have already taken place.

Impact on banking transactions
Pressure on bank capital levels will remain a key driver of M&A activity in the sector, as banks continue to review strategies around ownership of non-banking businesses and exit non-core geographies.

Growth opportunities in emerging markets could continue to see more inward investment from developed markets. As banks’ capital levels stabilize and increase through improved profitability, we expect to see an increasing ability to structure deals where the price to capital ratio is achievable. Regulatory driven M&A will continue to drive transaction activity, especially in Europe where a number of governments are formulating exit plans for their banking stakes.

Impact on insurance transactions
The on-going relative strength of M&A activity in the insurance sector has been driven by sellers judging that their price expectations had become more closely aligned with those of buyers. Restructuring of portfolios by insurance companies continues to be a recurring theme, as insurers streamline their operations, focusing on greater capital efficiency and on cash-flow generation.

Impact on asset management transactions
As equity markets achieve new highs, we expect the asset management sectors’ performance to improve. However, we see existing asset managers as remaining cautious, being primarily focused on organic growth, with acquisitions being modest and focused on product in-fill or geographic expansion.