After a somewhat turbulent year for bank M&A in 2023, what’s in store for 2024? Is bank resolution driven M&A safely behind us? Do bank boards have M&A on the agenda for this year? We look at five potential trends on the bank M&A front in 2024.
Bank resolution driven M&A
By its very nature, this type of bank M&A is identified late and implemented fast. Some of the vulnerabilities that gave rise to levels of activity in 2023 seem likely to persist throughout 2024. Some regulators are already reviewing existing, or consulting on new, funding models to address the question of cost allocation on future bank resolutions. The Financial Stability Board’s 2023 Resolution Report identifies some of the key lessons learned from the 2023 activity and indicates a potential direction of travel for this year that could have a bearing on how regulators approach similar activity in 2024. The ability of potential participants to evaluate the potential risks and navigate the complexities of implementation on the accelerated timescales demanded will likely inform the evaluation that regulators need to make in these situations as to the best option to pursue.
Cost of compliance
As regulators around the world continue to demand greater in country and at source compliance capability and functionality, pressure continues to build on previous long standing compliance models and infrastructure support frameworks. The cost of meeting these changing requirements, coupled with heightened risk weighting sensitivity in certain business and product lines, will drive some banking groups to jettison relevant business lines, products or client groupings. Banking groups will likely favour business lines and products that can attract the broadest set of potential buyers, particularly if private equity activity in the sector remains subdued through the course of 2024.
Regulatory and capital driven restructuring
The impact of some of the more transformational regulatory agendas, including the EU’s intermediate parent undertaking regime and upcoming application of Basel 3.1 standards, coupled with generally higher levels of regulatory oversight and scrutiny will start to be felt more keenly in 2024 as banking groups continue to adjust their structures and booking models and optimise their capital deployment strategies. Part of these ongoing adjustments will lead to divestments as well as targeted acquisitions and investments that align with the anticipated future steady state position, including a potential revival of more cross-border partnership and referral arrangements that offer access to markets while minimising the associated up-front costs and mitigating the impact of stranded costs on any future exit.
Stranded assets
Notwithstanding the clean outs that occurred in the years following the Global Financial Crisis, a number of banking groups still retain large portfolios of written down assets on their balance sheets. Many of these stranded businesses or assets have long resided in the “too difficult to exit” basket. The prospect of realising a profit over the previously written down carrying value has not been enough to outweigh some of the other factors impacting exit potential. These have included items such as legacy licence dependencies running across business lines as well as the potential impact on wider relationships with existing or target clients and/or in-country regulators. In 2024, we are likely to see that balance of factors shift back in favour of partial exits and/or partnered wind downs.
European secondary debt market
Although we are unlikely to see a return to the buoyant deal conditions of some years back, the implementation across the EU of the new Directive on credit servicers and credit purchasers is another step in the EU’s ‘Action Plan to Tackle Non-Performing Loans in Europe’ by further developing the secondary market for non-performing loans (NPLs). Whether it has the intended impact of facilitating greater participation in the EU’s NPL servicing and secondary debt trading market by non-EU purchasers may start to be seen in 2024 as EU countries apply their respective implementing regulations. There are clearly some advantages for selling banks in areas such as provision of information to prospective purchasers but whether the overall benefits to sale processes are sufficient to create a catalyst for more deal activity remains to be seen.
