Insights on financial services M&A | December 2019

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

CECL M&A Considerations

The Current Expected Credit Loss standard (CECL) comes into effect for SEC filers (except Small Reporting Companies)1 on January 1, 2020 and for private companies on January 1, 2023. Affected companies have had several years to prepare for the standard, but less attention has been paid to the significant impact this new accounting methodology will have on mergers and acquisitions, including its influence on transaction pricing and other valuation factors. Many acquirers are now beginning to awaken to the impact of CECL as adoption approaches.

Knowing and anticipating CECL’s future financial impact on a target's enterprise value, balance sheet, and accounting for the transaction is necessary for deal modeling and structuring. According to KPMG’s 2019 CECL Survey, respondents who expect CECL to increase their credit reserve believe it will result in a 29% increase to the allowance, on average. Potential earnings and valuation impacts include: 1) a one-time charge to earnings upon implementation to increase the allowance, 2) a reduction in capital as a result of the higher allowance, which could impact covenant compliance and regulatory capital requirements, and 3) increased earnings volatility due to unexpected changes in macroeconomic variables or changes in expected cash flows from Purchased Credit Deteriorated (PCD) assets.

The potential implications outlined above will affect all stages of transactions, and it is important for acquirers to assess the impact both on the target company’s financials and valuation, and on purchase accounting. Acquirers will also need to understand the status of the target’s CECL readiness and adoption process. While public companies are in final stretches of adoptions, major challenges still exist around process, data, controls, and modeling choices. If an acquisition target is not prepared for CECL, acquirers should consider future required expenditures for people, advisors, and/or systems to assess the impact of CECL and adopt the related accounting guidance.

Furthermore, while private companies will not be required to adopt CECL until 2023, an IPO or sale to a public company may require an accelerated adoption of CECL. Thus, PE owned lenders should be prepared for CECL such that a deal will not fall through due to accounting compliance. Acquirers and sellers must prepare now to adequately understand CECL’s requirements and be ready to make well-informed acquisition decisions going forward.

Further KPMG insights on CECL’s impact on M&A: M&A must move to address CECL’s imminent impact

[1] The FASB issued Proposed Accounting Standards Update, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates August 15, 2019.  The proposed Update would allow private companies, not-for-profit organizations, and certain small public companies to adopt current expected credit losses (CECL) in the fiscal year (including interim periods within that fiscal year) beginning on or after December 15, 2022.

Additional KPMG Insights

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The Pulse of Fintech H1 2019

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2019 Fintech100: Leading Global fintech innovators

The financial services industry is rapidly changing with the emergence of innovative, new products, channels and business models. KPMG and H2 Ventures have compiled the Fintech100, which analyzes the ‘Top 50’ and ‘Emerging 50’ companies that are building off technological innovations and disrupting the financial services industry.

A 'maniacal pace' in the digital banking race

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Banks have been willing adopters of data analytics; however, executives have grown increasingly frustrated with the lack of timeliness and reliability of the output. Focusing on data analytics technologies that are smaller, more agile, faster, and scalable can generate better results. “Banking on data analytics? Think fast” highlights ways banks can simplify data analytics strategies to provide meaningful insights at a fractio

    Price / last-12-months EPS

  1. Transaction prices in the insurance brokerage space continued to grow in 2019, with the average deal priced at 10.94 times EBITDA in Q2 2019 (10.86 in Q1 2019). The multiple has been on the rise since 2016.
  2. P/E ratios in all other segments continue to decline in 2019 in line with public markets and economic uncertainty.

    Price / book

  1. Broker/dealer price to book values slid in 2019 as a result pressure on commission rates industry wide.
  2. Banking sector price/book ratios declined in line with public markets and in response to rate cuts.

    Return on average shareholders' equity (%)

  1. Insurance carrier and investment advisor ROAE declined sharply in Q1 2019, partly driven by a change in GAAP accounting standards which triggered equity investment write-downs.



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