The latest data from the consulting company EY only backs up what was already said: the number of deals in the European banking sector fell year-over-year in the first half of 2023, from 139 in the first half of 2022 to 125 this year; the total value of deals also fell year-over-year, from £18.5bn to £13.7bn.
At the same time, the European financial services industry revealed the most deals in nine years in the first half of 2023: 382. This is up 13% year-over-year from the same time in 2022 when 337 deals were made across the region. However, sales in the European financial services business are going down in the banking sector, even though insurance wealth and asset management are growing.
“While financial services M&A activity across Europe appears to have had a strong start to the year – reaching a nine-year deal volume high – overall deal value has fallen 28% year-on-year. Amid a turbulent six months in the European financial sector, we have seen fewer large deals completed and an increase in smaller bolt-on acquisitions. It remains an uncertain market environment, with ongoing high inflation and rising interest rates impacting operational and funding costs, and within an M&A context, valuations, and appetite, and we expect lenders and dealmakers to continue showing signs of caution in the short term”, comments Benoit Gérard, EY EMEIA Financial Services Strategy and Transactions Leader.
Obstacles to Transactions in the banking Sector in Europe
The big challenge facing the banking sector in Europe is called interest rates. They are the main reason for the decline in merger and acquisition activity in this market. Why?
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Banks have large amounts of corporate, consumer, and sovereign debt lent at lower interest rates, explains the Financial Times in an analysis. Accounting rules say that assets must be revalued at a much lower value than the new loans after any purchases. This is making lenders delay their plans.
It is common to revalue assets and debts at market prices after a takeover. The buyer makes money when they buy a business for less than what its assets are worth. This is how most European banks do business. But if the assets are damaged, they could be lost, and the customer might even have to put up more money.
Experts say that the sudden and painful loss of value is caused by interest rates rising so quickly. For example, when Credit Suisse bought UBS, the value of the assets it bought had to be changed by $13 billion, which cut UBS’s profit on the deal.
Experts say also that the expected consolidation in the business will not happen for at least two years. Several possible mergers were already being thought about, such as UniCredit buying Société Générale or Deutsche Bank absorbing its local rival Commerzbank. Most lenders are now choosing to pay bonuses and buy back shares with the extra money they get from higher interest rates instead of making deals.
The Swiss Banking Industry – not a significant deal Activity
There aren’t any big deals going on in the Swiss banking and capital markets area right now. PwC sees a clear trend in the area toward changing business models and going digital, which is being dealt with in both natural and artificial ways. But there are a lot of great options that can help a bank skip ahead of its transformation.
“Despite economic difficulties, M&A is still a key driver of transformation in financial services. Dealmakers are now using smaller transactions to advance digitalization, ESG integration, and portfolio optimization”, comments Marc HuberDeals Financial Services, PwC Switzerland.
In conclusion, rising interest rates in Europe are slowing down merger and acquisition (M&A) activity among European banks, which is the opposite of what was expected at first. The changing interest rate situation is showing how much assets have lost value, which keeps lenders from going through with deals.
