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Banks and insurers account for a large proportion of the capitalisation of the world's stock market, and as in other sectors, mergers and acquisitions (M&A) have been on the rise in the past year.
Global M&A among financial institutions reached $339bn in the year to September 19, according to Dealogic, putting the sector on track to record its most active deal making year since 2000. "We are expecting to execute an increasing number of compelling cross-border deals," says Andrea Orcel, Merrill Lynch co-head of Global Markets and Investment Banking, EMEA. "The increasingly supportive regulatory, political and market environment for those deals now makes them feasible."
The pick-up has been particularly striking in Europe, where the long-awaited consolidation among the continent's banks has begun to gather pace. After Santander blazed a trail for cross border deals last year with its purchase of Abbey National, the current year has seen more activity.
ABN Amro of the Netherlands and BBVA of Spain each launched bids for midsized Italian lenders. Then, in June, UniCredito of Italy agreed a euro16bn takeover of HVB, Germany's third-largest publicly traded bank.
Not all deals have gone as smoothly. Both ABN and BBVA faced opposition from Italy's central bank, and ABN clinched its deal after a lengthy battle only when investigators uncovered close links between the governor of the Bank of Italy and BPI, the small lender that had launched a counter bid. BBVA lost out to a rival offer from Unipol, a small Italian insurer.
However, observers have been surprised by the willingness of shareholders in European banks to accept the logic of buying rivals in other countries. This appears to have removed at least one of the hurdles that has stood in the way of consolidation in the past. "If you are doing a cross border deal in Europe the market has been quite supportive," says Ewen Stevenson, co-head of the European financial institutions group at CSFB.
"People feel there has been a change in sentiment among shareholders."
As a result, investors are busily trying to work out which banks will become the next target. Shares in Commerzbank soared this summer as a host of large European banks were rumoured to be considering a bid. Speculation is rife about which targets banks such as BBVA and BNP Paribas are likely to pursue.
That said, executives point out that the recent consolidation has involved larger banks buying smaller ones, with little question about who was in charge. Mergers between large European banks could be more difficult, as they would probably require compromises about the choice of chief executive or where to locate the combined headquarters.
"People will have to come to terms with difficult decisions," says Antonio Villalon, co-head of the European financial institutions group at Lehman Brothers. "Nobody is prepared to go hostile." One striking feature of European banking M&A has been the absence of US bidders. For years, executives have been confidently predicting the arrival of one of the large US banks. This year, however, Citigroup has been preoccupied with righting its internal woes while JPMorgan Chase has been integrating its merger with Bank One.
In June Bank of America, long seen as the leading candidate to buy in Europe, indicated its immediate future lies in the US when it announced the $35bn takeover of MBNA, the credit card group. It was the largest financial institutions deal so far this year.
Meanwhile, faced with benign credit conditions but slowing growth in their home markets, many banks have chosen to pursue growth in emerging markets. Although the privatisation process in Eastern Europe has largely run its course, lenders are eagerly pursuing what remains - 10 banks have submitted initial bids for BCR in Romania - while also looking to expand in countries such as Turkey, Russia and the Ukraine. Barclays of the UK became the first foreigner to buy a South African bank when it snapped up Absa, the country's largest lender.
Banks have been closely watching developments in China, which is seen as one of the main growth markets of the coming years.
After a lengthy dance that seemed to involve every large bank in the world, Bank of America emerged as the leading investor in China Construction Bank, while Royal Bank of Scotland took a stake in Bank of China with the help of Merrill Lynch and Li Ka-shing.
Investment bankers also predict activity at the smaller end of the market. The private banking industry is likely to continue to consolidate amid pressure on fees and the rising costs of information technology.
Mid-sized asset management groups also face pressure to merge in order to benefit from economies of scale. Provided credit conditions remain benign, M&A in the financial institutions sector is likely to continue at an increased pace.
Under syndication arrangement
with FE
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