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How M&A can help banks thrive in the next normal

Despite positive signs, the COVID-19 pandemic will have lasting effects, and the “next normal” that will follow it is uncertain. More than a year into the pandemic, the coronavirus continues to threaten people around the world, and economies are changing in unexpected ways. However, vaccination rates are picking up in several countries, bringing relief to many. There is evidence of resilience in the economy as well. Stock markets have shown robust performance so far in 2021, with most sectors exceeding their prepandemic capitalization by double-digit margins as of May (Exhibit 1).

Exhibit 1

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For banks, the pandemic has propelled major shifts in customer and employee expectations. Also, especially in some markets, banks have seen a buildup of loans that may become nonperforming at the end of government moratoriums.1 To keep up with change, overcome the obstacles, and navigate the next normal, banks must adapt, and strategic pursuit of M&A can give them advantages in this effort. But not all mergers are equally effective. In this report, we outline four M&A approaches that banks should consider as they realign to succeed, and we offer practical suggestions on implementation for each approach.

The case for M&A

Even before the emergence of COVID-19, banking was undergoing rapid change. Once the crisis hit, consumer preferences and behaviors accelerated. In a May 2020 survey of more than 8,000 consumers around the world, 20 percent said they expected to rely more on digital banking channels even after the crisis passes. In Western Europe, even customers 65 years and older now prefer to handle everyday transactions digitally.2

Meanwhile, a growing array of nontraditional players, including fintechs, e-retailers, and other big nonbank technology companies, are disrupting incumbents. Private-equity players are stepping up to play an increasing role in the consolidation of the financial-services industry—not only in payments but also in asset-heavy businesses. In addition, private equity will likely continue to disintermediate profitable customer-facing businesses, in many cases without investing vast amounts of capital.

In our May 2020 article, “No going back: New imperatives for European banking,” we shared our perspectives on how banks could rethink their strategies to ensure profitable growth in the wake of the crisis. Ideas included adapting to changing customer preferences and getting fitter to survive in tough times—for instance, by creating a more scalable cost base and doubling down on risk and capital management. We argued that M&A could be a key tool to accelerate these shifts.

Banking M&A activity in the region has indeed continued strong in 2020. The value of announced transactions has declined by 17 percent compared with the previous year, in dramatic contrast to the 70 to 85 percent declines observed in the aftermath of previous economic downturns (Exhibit 2). In fact, the total value of announced deals would have grown if not for the impact of a single large transaction announced in 2019: the London Stock Exchange Group acquiring Refinitiv in the single biggest banking M&A transaction of the previous decade in Europe, the Middle East, and Africa (EMEA). And growth did occur in absolute terms for banks and payments companies—two verticals that typically account for a large share of the banking sector’s total transaction value.

Exhibit 2