M&A Crystal Ball: A Fund Run on Big Banks Raises the Spectre for Further Sector Consolidation

By February 22, 2019 February 9th, 2021 No Comments
Big bank investor flight fuels outlook for mergers and acquisitions

2018 was not kind to the world’s biggest banks.

Faced with the perfect storm of global economic headwinds, whipsawing markets, and a raft of compliance scandals, the most staid names in the sector were handed the near-impossible task of preserving and/or restoring investor confidence.

Steven Holden of Copley Fund Research clearly illustrated this deep impact in a study published on Smartkarma.

Holden swept through 255 global equity funds and the holdings of the 18 largest financial institutions (by total assets) from across three regions – the US, EMEA, and Asia.

What he discovered was nothing short of alarming: Bank share ownership plunged through 2018 for all but four stocks, with the number of funds selling far outnumbering those buying.

Large global banks - key changes in ownership 2018

“It is clear that global investors are shying away from exposure towards many of the global mega-banks. Though most of these stocks have already endured a tough ride in 2018, the severity of the exodus points to a broader drop in confidence among global investors,” wrote Holden, summing up his findings of the study.

M&A’s Uplifting Effect

What could this worrying trend of investor flight possibly lead to? It shouldn’t come as a shock that such dips in confidence might actually spur increased bouts of M&A activity among the “mega-banks”.

Mergers and acquisitions have historically proven to be a near-surefire way to reverse risk-off moods, as well as usher in much-needed stability during periods of uncertainty.

About a decade ago, with the global financial crisis in full force, Bank of America (BofA)’s acquisition of Merrill Lynch (ML) helped stave off a total unravelling of the retail brokerage.

Fast-forward to early 2019, under relatively healthier economic conditions. News of BB&T’s decision to acquire SunTrust and rebirth the combined entity as the sixth-largest US commercial bank by assets lifted shares of both companies.

These two mergers may have happened under different circumstances but they have one key benefit in common: the promise of cost savings – and lots of them.

For BofA and ML, it meant shaving as much as US$7 billion in expenses over a four-year period.

For BB&T and SunTrust, the lure of a more than 10 percent cut in running costs, thanks to shuttering redundant branches and digital systems.

Lower operating expenses widen operating margins, which, in turn, free up cash for other purposes. Whether using that cash to pay down existing debt or to invest in digital transformation, a strengthened financial state almost always builds confidence in investors.

Deutsche Bank-Commerzbank

But the BB&T and SunTrust marriage may only be the tip of the iceberg of what’s to come for the year ahead.

Also red-hot on the prospective list is Germany’s Deutsche Bank (DB) and Commerzbank (CB).

The catalyst? DB’s persistent struggles to pull itself out of a financial quagmire after four years of declining revenues, with no viable plan to reverse its misfortunes.

Add to the challenge a constant string of lawsuits, regulatory investigations, heavy fines (US$17 billion in the past decade), and soured bets, like the US$1.6 billion loss it incurred on a pre-financial crisis municipal-bond wager. It’s not surprising DB features among the six banks suffering from the highest investor flight, based on Holden’s study.

Adding insult to injury, the current weakened state of investor confidence could deteriorate still further: A credit-rating downgrade on the bank has led to higher borrowing costs, making a recovery even more difficult to achieve.

Just like BofA-ML, the common narrative put forward by market pundits is that either DB find some miraculous way to turn things around, or be subject (quite possibly) to a government-arranged marriage with domestic competitor CB.

Barclays-Standard Chartered

Elsewhere in the UK, a merger between Barclays and Standard Chartered doesn’t seem so far-fetched, either.

The idea was initially mooted in May 2018, when Barclays began studying the viability of merging with another international bank.

Since then, the impetus to go through with it has only increased with a no-deal Brexit looking more likely than not.

Creating this hypothetical British banking juggernaut will bring the duo financial security and business synergy.

Financially, their combined balance sheet would help withstand any Brexit fallout post-29 March. And, on the synergistic front, Barclays’s established UK business will more than complement Standard Chartered’s entrenched presence in far-flung emerging markets, like Africa.

A merger of this magnitude, at least in theory, carries the potential to deliver a confidence boost for investors seeking stability and room for growth.

More Reasons to Deal

In addition to the aforementioned factors, there are other reasons why more consolidation could happen in the financial services sector this year.

For example, looser US regulations and a tax overhaul are freeing up increasing hoards of cash on bank balance sheets – ammunition to do deals with in the States.

In fact, an M&A report prepared by Ernst & Young showed that the value of M&A activity in 2018 (US$196.5 billion) rose by 139 percent from the year before (US$82.3 billion).


Annual increase in financial services merger activity 2018


Then, there’s the argument of cannibalisation caused by the presence of too many small players competing in a single market.

As BofA Chief Executive Brian Moynihan aptly puts it, “There are now 6,000 odd banks [in the US], and you’ll find them continuing to consolidate.”

It’s time to ratchet up those wagers on the next banks in line to get hitched. The return of lost confidence from institutional investors is not far off.

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