Brave new world: New frontiers in banking M&A, a research from PwC has found that recent years’ decline in banking M&A is not simply due to a cyclical downturn but represents a radically changed economic and regulatory environment.

The sovereign debt crisis in Europe will continue to affect banking M&A for as long as it continues. The political and economic uncertainty emanating from the eurozone is making it harder to predict future impairments, agree on valuations, arrange funding and gain shareholder approval. The crisis is also having a significant impact on deal confidence, and thus frustrating M&A.

The picture is less gloomy in the USA but some banking institutions still have significant restructuring ahead of them. Those in stronger financial shape are well placed to expand overseas. Asia-Pacific and Latin America will be the most attractive regions for outbound M&A, as the growth in middle income consumers and the rapidly expanding corporate sector demands more services.

High growth economies are now homes to some of the world's largest and increasingly influential banks. A far broader range of institutions are initiating transactions than in the years leading up to the financial crisis. Increasingly, banks from high growth economies are becoming more active acquirers, both in their home markets and abroad, and are establishing their own approaches including partnerships and distribution agreements.

Bank restructuring to trigger deal making

Restructuring will remain the most important driver of banking M&A in Western Europe over the next few years, as banks seek to focus on core businesses and exit peripheral activities. Despite a backlog of potential disposals, market volatility and uncertainty over banks’ potential credit losses mean that buyers and sellers may continue to struggle to agree on valuations.

Finding buyers for non-core businesses will also remain challenging. Many European banks are effectively barred from acquisitions by capital restrictions and investor scepticism. Nor are many banks from outside Western Europe attracted to invest in the region. Even so, there may be interest from some Asian players in distressed European targets that offer the chance to build a niche presence or acquire useful skills and expertise.

Grégoire Huret, partner, PwC Luxembourg, said: “Regulatory changes and market restructuring have driven banking M&A operations in Luxembourg. The country’s marketplace is very attractive to new banks which enter through acquisitions or Greenfield developments. As for banks already present, they are very active in consolidating the local market.”

Brave new world: New frontiers in banking M&A is available for free download at www.pwc.lu/en/publications/index.jhtml