European bank M&A is poised to rebound in the coming year as falling inflation and lower valuations drive consolidation, particularly in the fintech and advisory segments.
Dealmaking was particularly lackluster in 2023, with bank M&A in Europe sinking to its lowest level for at least six years, S&P Global Market Intelligence data shows. The fourth quarter of 2023 was the weakest three-month period since before 2018.
The data is reflective of a broader slowdown in M&A, driven in large part by high inflation and interest rates that have made financing transactions more expensive. Yet there is room for cautious optimism in 2024 owing to favorable moves in inflation data, according to Tom Macdonald, head of banking at Deloitte, even if the market may not return to the heady heights of 2021.
"While the timing itself is a little hard to call, we expect a gradual buildup and do believe it will be a better year than 2023 in aggregate," Macdonald said.
Fintech discount
There are strong prospects for banks to enter joint ventures and partnerships with fintechs in 2024 as lenders seize the opportunity to enhance their tech capabilities, according to Benoit Gérard, EMEIA financial services strategy and transactions leader at EY.
Financial technology M&A deals globally totaled $29.92 billion in 2023, down from $37.56 billion in 2022 and $76.15 billion in 2021, Market Intelligence data shows. With interest rates playing a part, this was supported by sellers refusing to lower valuations in the bleak market.
While several deals did not come to fruition in 2023 in large part due to mixed macroeconomic signals, banks could capitalize on fintechs' struggle for profitability and access to capital in 2024, as more will be available at lower valuations than in previous years, according to Bain & Co.'s 2024 M&A report.
One area in particular focus is payments. "As the payments chain becomes more digitized, it's likely to be to an extent disruptive to M&A markets, and we think that presents a potential opportunity," Macdonald said.
Activity has already started in 2024, with French lender Crédit Agricole SA in January buying a 7% stake in Paris-based payments group Worldline SA. The deal came after Worldline's share price fell nearly 70% in a year amid lower financial guidance, regulatory scrutiny in Germany and activist investor attention.
Another payments company, London-based CAB Payments Holdings Ltd., lost over 70% of its market value months after its July 2023 IPO, when it slashed revenue forecast by 17%.
"It is a sector where stock markets have repriced many of those institutions, which perhaps could lead to more activity," Macdonald said.
There is also pent-up demand for deals in specialty finance, such as mortgage lenders, that give banks a different portfolio of products, Macdonald said. Several specialist lenders are backed by private equity funds, which could hold the key to deals his year. "As a number of the funds are approaching term, the market could witness banks swooping in for them," he added.
Pressure to consolidate
One area that has produced a number of tie-ups recently is investment banking, as weak M&A and IPO activity has reduced fee income in the sector and increased pressure on smaller players to consolidate.
Deutsche Bank AG acquired UK-based Numis Securities Ltd. in a £410 million deal that was completed in October 2023. Consolidation was seen globally too, as Japan's Mizuho Financial Group Inc. purchased US-based Greenhill & Co. Inc. for $550 million.
The pressure is especially acute in Europe, given the growing market share of North American investment banks on the continent. "That creates quite a difficult competitive dynamic. And in that environment, to be meaningful, it's likely that greater scale makes sense. There is quite some pressure to consolidate," said Hyder Jumabhoy, partner and co-head of EMEA financial services M&A at law firm White & Case.
The UK was the most active European geography for banking M&A in 2023, Market Intelligence data shows, and that was particularly evident among smaller advisory firms. In addition to the Deutsche Bank-Numis deal, Cenkos Securities and FinnCap merged to create Cavendish Financial PLC, while Redburn (Europe) Ltd. and Atlantic Equities Service Co. Ltd. combined to create the transatlantic Rothschild & Co.-owned Redburn Atlantic earlier.
Consolidation has continued into 2024, with Panmure Gordon & Co Ltd. and its rival Liberum Capital Ltd. recently merging to create Panmure Liberum.
Banks looking for a strategic play on the brokerage side are less likely to get blocked by a competition regulator, which makes investment banks an appealing target. "Last year, banks realized there were some very good investment banking-specific shops that do not offer retail banking service," Jumabhoy said. "If you want access to the market and the people running those teams, an investment banking coverage acquisition makes a lot of sense."
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Big bank M&A
Consolidation on a greater scale became a hot topic almost immediately in 2024, with reports resurfacing that Deutsche Bank was mulling possible takeovers of ABN AMRO Bank NV and Commerzbank AG.
Though Deutsche Bank CEO Christian Sewing later said M&A was not a priority this year, 2024 could still usher in a new era of bigger banks looking at their competitors as potential targets or acquirers, according to Jumabhoy.
Boosted by a year of strong performance, pan-European and larger regional banks have better-capitalized balance sheets and clear inorganic strategies that cover both noncore disposals and strategic acquisitions, he said. Furthermore, many that received government aid following the global financial crisis are now no longer subject to historic restrictions that have hampered growth for over a decade.
"Some of Europe's largest lenders are actively considering inorganic opportunities, including transformational transactions," Jumabhoy said. "The shackles are now finally coming off."