Ultra low interest rates, tech enabled disruption and regulatory pressure, all of which have squeezed profitability and increased costs, have created an environment which will drive M&A activity across the financial sector throughout 2018 and beyond.
This is according to our Global Transactions Forecast, which anticipates that global M&A values in the financial sector will rise to USD 616 billion in 2018, up 25% from USD 462 billion in 2017. Similarly global IPO values will grow nearly 40% to USD 84 billion, led by FinTech unicorns raising capital for disruption, many of which will be Asian based.
Before the global financial crisis, many banks made a material chunk of their profits from the net interest rate margin (the spread between customer deposits and customer loans) but have not been able to do so since 2009 because of the extremely low interest rates that US and EU central banks put in place in response to the crisis.
"This has damaged the basic business model of many banks — a problem compounded by other escalating challenges arising from new technology, tech enabled disruption and intrusive regulation," said David Brimacombe, a financial industry specialist at Baker McKenzie based in London. "Consequently the banking sector will witness substantial consolidation at the national and regional levels."
Financial M&A in 2018: Key drivers
In 2018 we forecast M&A in North America's financial sector to rise to USD 259 billion, accounting for more than 40% of all sector transactions globally. Following North America is Europe with USD 195.7 billion, Asia Pacific with USD 122.7 billion, Latin America with USD 29.2 billion and Africa and the Middle East with USD 9 billion.
Financial IPOs in 2018: Key drivers
The total value of IPOs in the financial sector rose to USD 51.1 billion in 2017, up from USD 47.2 the year before. In 2018 we forecast IPOs to rise even further to USD 84 billion, driven by a number of factors, including the reprivatization of several large banks that were nationalized during the global financial crisis and the recapitalization of many financial institutions. Fintech start-ups established a few years ago will also fuel the increase in listing values as they scale up and look to IPOs to raise additional funding or to provide exits for their private equity and venture capital investors.
Following a peak in deal activity in 2018, we forecast that M&A and IPO transactions in the financial sector will drop in 2019 in line with a larger, worldwide trend of cooling deal activity in developed markets. An exception could be private equity-driven deals as they apply their vast dry powder cash stockpiles and consolidation in Europe if the EU's banking union plans are implemented. As interest rates rise, global trade and investment growth slows, and equity prices correct, we forecast M&A values in the financial sector to drop to USD 569 billion in 2019 and USS 450 billion in 2020. We forecast IPOs in the sector to decline to USD 82.4 billion in 2019 before decreasing to USD 59.3 billion in 2020.
Download the Financial Institutions Sector Forecast report to read more.
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