Insights on financial services M&A | August 2019

Explore topics impacting financial services and banking M&A along with a current overview of financial services valuation trends.

Bank M&A as a tool to improve technology

Historical bank M&A trends were subverted in the first quarter of 2019 by the announced mergers of equals (MOEs) of BB&T and SunTrust ($28.2 billion announced value), and Chemical Financial and TCF Financial ($3.6 billion announced value). These MOEs and other recent large transactions have shed new light on the drivers currently shaping the bank M&A environment.

Firstly, investors are rewarding smart valuations, and regulators appear keen to approve transactions. But more evident in recent mergers is the role of technology as a key deal driver. Banks have become increasingly focused on technology’s impact on their products and customer base as they strive to remain relevant in an increasingly technology-driven environment. Broad access to information through social media has increased customers’ price sensitivity, and the ease of mobile banking has made it easier for customers to switch banks. Additionally, banks are seeking to adopt new technologies as a means of addressing ongoing regulatory scrutiny and growing cyber security threats.

Whereas in the past, deals were driven by factors such as expanding geography, product capabilities, or depositor bases, technology is now a core consideration in acquisitions. Several recent mergers, including the MOEs mentioned above, have focused on synergy realization and reinvestment to enhance technology, which highlights the importance banks are now placing on technology as a means to remain competitive. While MOEs allow large-scale banks to leverage cost savings to invest heavily in technology, we also expect fintechs and digital banks to be attractive M&A targets for both large and smaller banks, as they offer an opportunity to adopt differentiating technology more rapidly than developing it in-house.

Whether technological considerations involve improving the customer experience or fortifying cyber security, technology is now at the forefront of banks’ business strategies, and hence their merger strategies. We expect this trend will continue, and even increase in prevalence, as banks continue to catch up to today’s security needs, customer expectations, and data-driven opportunities.

Financial services valuation trends

Click on the links below to download the charts.

    Price / last-12-months EPS

1. P/ E ratios in the insurance brokerage segment continued to increase in the fourth quarter of 2018 fueled by private equity-backed buyers, accounting for 56.6% of deals announced in the sector during 2018.

2. P/ E ratios in all other segments decrased as a result of the ongoing U.S-China trade dispute and other political uncertainities.

    Price / book

1. Broker / dealer divergence in P/B ratio driven by substantial increases in capital markets activity sustaining demand for brokerage and wealth management services


2. Price to book values within the banking sector continue to remain steady as loan portfolios across the sector experienced low to modest growth throughout 2018.

    Return on average shareholders' equity (%)

1. ROAE for investment advisors(20.3 in Q4-18) continues to grow as a result of strong investment manager performance in the fourth quarter.

2. Banking ROAE grew steadily in Q$ 2018, largely as a function of growth in interest bearing assets and wider net interest margins. Average return on assets in the sector grew to 1.33% for the quarter, compared to 0.58% in Q4 2017.

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