Deals: Is your
bank playing
checkers while
other banks
are playing
chess?
Status of the
marketplace
Over the past couple of years, regulatory guidelines, requirements and
processes that stemmed from the Dodd–Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank) adversely impacted the banking
mergers and acquisitions (M&A) market, and transaction activity fell.
As the understanding of regulatory guidelines has improved and banking
institutions have matured their ability to respond, a new deal environment
has begun to emerge, albeit with a tempered degree of enthusiasm.
This new deal environment will have vastly different strategic implications
across the banking landscape based on the size of individual institutions.
In addition, the level of involvement, focus and attention that divesting
and acquiring institutions must devote to risk and regulatory matters is
heightened and can make or break a deal. Additionally, the areas of focus
of different regulatory bodies such as the Consumer Financial Protection
Bureau, Office of the Comptroller of the Currency and Federal Reserve
differ, but each has the ability to greatly impact the pace of deal progress.
In turn, a much higher pre-approval bar exists that must be considered
in advance to determine the areas where something could make a deal
go awry. This inherently increases the complexity of approval and the
overhead burden required to move the deal process forward.
Recognizing the emergence of this new banking deal paradigm, and the
implications for individual institutions, will enable banks to better determine
how acquisitions or divestitures should fit into their broader strategic plans.
Furthermore, understanding the new normal around the involvement
of risk/regulation in deal execution will require an adjusted approach to
completing deals effectively.
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| Deals: Is your bank playing checkers while other banks are playing chess?
Using the landscape
to your advantage
Institutions that recognize and accept their specific placement in the new banking deal
paradigm will have an improved ability to strategically maneuver and to be forward looking in
how they prepare to execute on their capital/transaction strategies.
Fighting upstream against regulatory demands and staying on the sidelines are rapidly
becoming losing strategies for several institutions that do not have a differentiated market
position.
Three consistent themes that all institutions should consider as they pursue strategic
alternatives are described below:
1
The deal strategy,
execution and critical
milestones cannot be
viewed in isolation from
the broader regulatory
implications they can create
(for the buyer or the seller).
2
3
Aligning transaction
oversight and governance
with risk and regulatory
oversight/objectives is
critical.
Operational execution
and related implications/
risks are now front and
center, and must be clearly
articulated early and
throughout the life cycle of
the deal.
An institution’s ability to provide a sense of comfort and clear messaging across its applicable
regulatory stakeholders and around how each of the items above is being addressed as part of
the broader transaction will be highly correlated with deal approval and success.
Deals: Is your bank playing checkers while other banks are playing chess? |
3
Why size matters
The introduction of enhanced prudential standards (EPS) has created
definitive thresholds among (1) financial institutions having greater
than US$50b but less than US$250b in assets and (2) financial
institutions having greater than US$250b in assets. These thresholds
have created distinct and different implications for banks depending
on their present asset size.
The implications around these defined EPS thresholds extend
beyond the institutions that must meet the regulatory bar and have
dramatically shifted the strategic landscape within which banks must
continue to find ways to grow and/or optimize their deployed capital.
Over the course of the past year, we have seen institutions react in
very different ways to this new environment, including: (1) a full exit
of the US banking industry, (2) seeking to move non-core activities by
product or geography and (3) initial movement in M&A as regulators
have approved a few deals after a period of extended approvals.
The heightened regulatory requirements and oversight have forced
banking institutions’ hand and pushed them toward an ever more
apparent set of strategic paths.
The apparent strategic paths are defined by the equilibrium between
shareholder return and regulatory compliance; this is the point where
size matters.
Under the spotlight
Able to capture growth opportunities
• The banks above US$250b are realizing the most
significant regulatory pressure.
• Banks presently maintain a mix of core and non-core
businesses.
• An increased focus on the division of types of banking
activities is impacting existing business models.
• Banks that are below US$250b but above US$100b
have the scale and critical mass to absorb the
increased costs of regulatory requirements.
• Inorganic growth opportunities exist.
• Select banks can grow without
broaching US$250b.
US$250b
US$100b
Banks poised to broach US$50b and needing
to balance objectives
US$10b
Carpe diem
US$25b
• Banks that are below US$30b but above
US$10b
have the most flexibility and room for growth.
• Select banks have unique business models that
differentiate them.
• Assets being divested by larger banks could be of
interest.
• Some institutions could be desirable acquisition targets.
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| Deals: Is your bank playing checkers while other banks are playing chess?
Banks above US$50b requiring
growth
• Banks below US$100b but above
US$50b have inadequate scale
to deal with the regulatory cost
burdens associated with EPS.
• A need exists to identify strategic
growth options that will provide
US$50b optimal scale.
US
banking
landscape
US$1+
Structurally challenged
• The banks that are just below the US$50b
threshold need growth options, but they
grapple with the regulatory implications of
exceeding US$50b.
• Given that there is minimal precedent
for broaching US$50b, these banks are
seeking to understand the transformation
requirements that EPS will entail.
Shareholder returns by threshold
Banks that are able to effectively balance regulatory considerations
and develop differentiated strategies that drive growth, reward their
shareholders while creating competitive separation from their peers.
In the recent past, a review of shareholder return indicated size
across the categories of banks outlined does matter. However, larger
size does not directly correlate with improved shareholder returns.
Under the
spotlight
50
Able to capture
growth
opportunities
Structurally challenged
(>US$50b)
(<US$50b)
39.56
38.71
40
Shareholder return (%)
Carpe diem
30
20
13.61
10.60
10
0.50
0.15
(2.11)
8.66
4.95
4.52
0
12.73
(2.38)
Low
(6.13)
-10
Median
(12.94)
High
-20
(22.24)
-30
$250b+
$100b–$250b
$50b–$100b
$25b–$50b
$10b–$25b
Thresholds
Observations
• In the recent past, institutions above US$250b in assets have,
on average, made a marginal return to shareholders that is not
sustainable.
• Banks that fall below the critical US$250b threshold but above
the US$50b mark show an ability to recapture their potential
to generate shareholder return as they expand. The increase
in shareholder return for institutions that grow well beyond the
US$50b threshold is not only a reflection of scale and scope
economies, but also indicates an increased knowledge and ability of
management teams to run a highly complex institution.
• Contrarily, banks that fall within the “Structurally challenged”
categories show a significant drop in the ability to return
shareholder return on average as they grow beyond US$50b in
assets.
• Banks that are less than US$50b in assets reflect the greatest
ability to generate shareholder return on average; however, there
is a great degree of deviation in the returns generated across
individual banks.
• The deviation across smaller institutions not only reflects that
the number of competitors is creating clear winners and losers in
overlapping regional markets, but it also reflects that institutions
that are able to clearly differentiate their business models are being
rewarded, and shareholders reap the benefits.
Footnotes:
1. Source: SNL
2. Source: Analysis of US-regulated depositories and foreign banking organizations
Deals: Is your bank playing checkers while other banks are playing chess? |
5
Under the
spotlight
Able to capture
growth opportunities
Banks with greater than US$250b in assets are confronted by
regulatory and shareholder pressures that have forced them to
reevaluate the value of businesses within their respective portfolios.
The regulatory capital burden, or scrutiny associated with holding
certain businesses, has made it challenging to achieve the
necessary return on invested capital. In the present bank regulatory
environment, this dynamic is unlikely to change, and the nation’s
largest banks will continue to be strategically challenged.
Banks that fall just below the US$250b asset mark but exceed
US$100b are in an optimal position among the largest banks within
the current environment. These banks have achieved enough critical
mass to not only weather the cost impacts of the EPS requirements
for banks above the US$50b threshold, but they also have additional
growth runway before they breach the US$250b threshold. This
position offers these banks near-term opportunities, particularly as
the banks with more than US$250b in assets shed desirable assets,
and some banks in the range below US$25b are open to strategically
aligned suitors.
As this environment perpetuates, sizeable divestitures will continue
to be executed among the banks with balance sheet assets
exceeding US$250b. Furthermore, wind-downs, which were once
considered to be palatable only as a last-resort strategy for failing
business, will be considered an optimal exit strategy when a market
exit is the end goal.
In select instances where the divestitures or wind-downs are
spanning multiple business lines or geographies, the previous deal
execution capabilities of these mature and highly capable banking
organizations will need to evolve. This will require new thinking so
that the inherent complexities of these multi-faceted deal programs
are well thought through and not handled as independent, one-off
divestiture programs. Executing a suite of divestitures, which only
in aggregate will result in the bank realizing its desired outcome,
will create risks of lost value, cost overruns, unintended client
impacts, and extended timelines to exit, all of which are highly
undesirable.
As a new but tempered optimism around closing deals has emerged,
these institutions are going to continue to seek ways to acquire. Doing
so will not be devoid of regulatory scrutiny from various directions;
however, an institution’s ability to demonstrate its strategic rationale
and focus on actively managing risk and regulatory challenges in
tandem with acquisitions will allow for deals to progress. Although
these banks may not be as focused on divestitures, there is a unique
opportunity for a combined acquisition and divestiture approach to
be utilized in order to continually refresh the portfolio while capturing
aligned growth opportunities.
Strategic impact
Strategic impact
• These institutions will maintain active strategies focused on
rigorous portfolio reviews, and capital optimization across
businesses will be central to continually enhancing focus on
the core.
• These institutions will be able to use a combined strategy
of opportunistic inorganic growth combined with a strong
core/non-core capability review that could generate sustained
growth.
• Development of effective approaches for harvesting and
redeploying capital from divestitures will become a strategic
advantage.
• As growth options are pursued, focus should be maintained
on profitable growth options that maintain a balance between
balance sheet expansion and achieved margin.
• Firms expecting large-scale transactions will need to upscale
their operational execution competencies in order to deal with
the complexities/challenges they will encounter.
• Although the ability to get acquisitions done exists for these
institutions, capitalizing on the availability of desirable assets
will require an inclusion of regulatory considerations early and
in tandem with deal strategy.
• A laser focus on cost efficiency and rapidly acquiring or
building advantages through innovative technology will also
be a focus as new and disruptive competitors increasingly
apply pressure on the business models of incumbent
institutions.
6
Up until mid-2015, this group would have not been considered
in an optimal position as regulatory reluctance to approve deals
set the tone across the banking deal market. In the second half of
2015, several institutions within this size bracket have successfully
received approval for deals, and that shift is beginning to open up new
dialogues around how deals can get done effectively.
| Deals: Is your bank playing checkers while other banks are playing chess?
• Similar to the institutions above US$250b in assets, these
banks will require a focus on cost efficiency and technology
innovation.
• There is a unique opportunity for these institutions to also
strive to differentiate their business models as well as
increasing focus on select business lines and geographies.
Structurally challenged
Banks above US$50b requiring growth
Banks poised to broach US$50b and needing to balance objectives
Banks that are above US$50b but have not achieved the necessary
scale or critical mass that would permit them to absorb the cost
burdens that become inherent above the defined regulatory
threshold for EPS are in a suboptimal strategic position. These
banks have been held to regulatory standards that require
internal reporting, infrastructure and programs that are identical
to those required for an institution of up to US$250b in assets.
The associated cost burden of these requirements for smaller
institutions has a differential impact on their financials and
operating structure, and in tandem they face inefficiencies of a
ramp-up period when they first take on EPS efforts.
Banks that are below US$50b in assets but above US$25b are not
subject to EPS. However, their positioning in the market and need for
growth will force them to act or be acted upon. Stagnancy will not
be a viable option, and shareholders’ expectations will drive them to
consider making acquisitions that would grow them toward and above
US$50b. Alternatively, they will consider, or be influenced to consider,
full-enterprise sales.
Adding further complication, size reduction is not an option, as
moving down in asset size is not desirable from a management or
shareholder perspective. In turn, these banks will need to grow
organically or inorganically out of this suboptimal positioning.
Pursuing inorganic options presents immediacy and speed that
cannot be replicated through organic growth.
Similar to the banks that are able to harvest opportunities, those
in the undesirable “Structurally challenged” category will need to
become increasingly active in identifying acquisitions that are a
strategic fit and will also need to focus on actively managing risk
and regulatory challenges in tandem with acquisitions. Although
divesting non-core is always an alternative, it is anticipated to be a
lesser strategy in the near term for banks within this size range.
The banks that do brave the path of growing through acquisition in
a manner that will place them at or above the US$50b threshold
will continue to be pioneers in the near term. Thus far, only one
institution has taken this on. Pursuing this strategic path will require
institutions to take on and manage transformation initiatives aligned
to areas of regulatory scrutiny and requirements in conjunction
with managing integration activities. Placing equal weight on these
two items is prudent and should be considered when a bank has a
target acquisition that will require more than US$50b in assets in
the pre-signing phase. Carefully planning deal milestones, such as
the transaction close, in alignment with the effective date for EPS
regulatory requirements can optimize time and allow for a more
measured absorption of the changes that will be required.
The acquisition strategies of banks that are within this group will
require a balance between immediate growth and forward strategy. As
banks move above US$50b and shift from one area of “Structurally
challenged” category to the next, they should already be thinking
about (1) what steps and actions they will need to take to leapfrog the
inherent learning curve of being subject to EPS for the first time; (2)
building a sound platform that can allow for further growth and stand
up to regulatory expectation and (3) the next acquisition that will
allow them to achieve necessary scale.
Strategic impact (>US$50b)
Strategic impact (<US$50b)
• This institution group will need to actively seek logical
acquisition targets that fit well with their broader enterprise
strategy and portfolio; however, adjacent deals will not be
sufficient enough to drive the growth needed, and they will
need to begin looking at mergers of equals and/or acquisitions
of institutions in the range below US$50b.
• As these institutions consider acquisitions they should
evaluate a longer-term pipeline of deals that could move them
fully out of the “Structurally challenged” category.
• The articulation of the deal strategy will be very important
for these institutions as they will have to make it evident to
regulators why an acquisition is good for the market and
account for the inherent risks as a central part of the deal
execution.
• Recent successful acquisitions (approved by the regulators)
have utilized an approach of placing a risk committee at the
top of the overall integration (potentially an emerging best
practice), or at a minimum have given risk groups a critical
role in the steering committee.
• Considering a transaction will require additional and
simultaneous evolution of EPS requirements and the related
implications; i.e., institutions will need to begin considering
broader platform impacts of breaching US$50b, and it will
be a necessity to begin building a future operating model at a
much quicker pace than in typical acquisition scenarios.
• The overall deal strategy will have to incorporate the impact
of regulatory timelines and expectations as well as a focused
regulatory communication strategy.
• Strategically and protectively involving risk and regulatory
groups in the deal oversight and the development of
regulatory programs that align with deal strategies is
becoming a differentiating capability.
Deals: Is your bank playing checkers while other banks are playing chess? |
7
Carpe diem
Beneficiaries
Banks that are less than US$25b in assets but greater than US$10b in assets
maintain the greatest flexibility and prospects in the new deal environment.
The challenges and hurdles faced across other banks larger in size across the
sector will open up growth deal opportunities for these firms. Additionally,
these banks have no concern about breaching critical regulatory thresholds in
the near term.
“Shadow banking” — broad
lending activities outside
the banking system
As a result, growth prospects are more bountiful for these banks in a way that
they weren’t in the periods prior to Dodd-Frank. Larger institutions are now
held to a very high standard of proof that an acquisition is beneficial before
they proceed with a deal, and that prevents larger institutions from acting as
quickly as they might have in the past on deals that become available.
• The new deal environment has strengthened
and deepened the presence and involvement
of shadow banking institutions in lending
activities (e.g., unsecured lending, business
loans, student loans, mortgages).
Additionally, as larger institutions shed assets through divestitures, this group
of banks will have an ability to move quickly to capture deals that are aligned
to their overall strategies. Alternatively, they will have the ability to double
down on adjacent acquisitions that are aligned with their core businesses.
Furthermore, this group of banks continues to be ripe for consolidation and
will also be attractive to institutions that are in the “Structurally challenged”
and “Able to capture growth opportunities” categories.
These banks will begin to realize increased deal flow internally and externally.
Depending on the individual bank’s strategy, there are many strategic paths
that can be pursued, so one of the greatest challenges will be staying true to
defined strategic vision and not getting distracted by available assets that are
off-strategy but potentially near-term accretive.
Strategic impact
• These institutions will have the greatest latitude in their strategic
growth options, and they should be opportunistic and relatively
aggressive in seeking growth.
• A successful portfolio growth strategy and composition will manage
short-term growth objectives with a long-term vision that accounts for
the challenges and hurdles the bank will face as it grows.
• Select institutions in this size range presently have unique and
differentiated value propositions that they can continue to build on
through organic growth or through adjacent acquisitions outside of
the traditional banking realm that remain tightly aligned to their core
business strategy.
• Mergers of equals and consolidations may also be an optimal way for
some banks in this group to expand their market footprint; and there is
the potential for the long-awaited mid-market consolidations to occur
among this class of banks.
• This group will also have the opportunity to benefit from assets that
the larger institutions (>US$250b) begin to shed; the challenge in
acquiring assets being divested by the larger banks will be making
certain that the strategic fit and alignment with the bank’s broader
business portfolio exist and that opportunistic transactions don’t lead
toward a heterogeneous portfolio of misaligned businesses.
8
| Deals: Is your bank playing checkers while other banks are playing chess?
• Shadow banking institutions presently have
greater flexibility to act on assets that may
come available given they are not subject to
the regulatory requirements banks face.
• Additionally, their business models allow
them to act faster and take more risks than
traditional and mature banking organizations.
• Shadow banks should remain aggressiveness
in acquiring target assets out of banking
institutions while carefully assessing the
balance sheet composition they form.
• The lack of regulation in this space is not likely
to remain forever, especially as the segment
grows; but in the near term, it remains a very
beneficial position to be in and is likely to see
continued inorganic growth prospects.
What strategies will
define your bank?
There is no “one size fits all” strategy or set of strategic actions that will work across institutions of a specific size. However, each bank’s ability
to create the appropriate balance and composition of strategies going forward will define its ability to not only survive but also to build a
differentiated and sustainable business model that can weather the challenges posed by an environment that is disrupting business models that
haven’t changed dramatically in the last century.
• Effectively reduce costs
• Focus on acquiring innovative technology
Under the spotlight
Able to capture growth opportunities
•
•
•
•
• Acquire opportunistically in alignment with core
businesses
• Focus on profitable growth
• Consider regulatory implications early
in the deal process
Review portfolio actively
Recapture capital through divestitures
Redeploy capital toward core businesses
Enhance deal execution capabilities to deal with
increased complexity
US$250b
US$100b
US$10b
Carpe diem
(>US$50b)
• Seek large-scale acquisition
options, including mergers of
equals (MOE)
• Proactively account for deal risk
• Articulate market and consumer
value early
• Redefine methods of engaging
risk and regulatory competencies
US$50b
in deal execution
US
banking
landscape
US$1t+
Structurally challenged
Structurally challenged (<US$50b)
US$25b
• Seek growth through
acquisition
• Consider targets outside of banking that
are core to differentiation
• Remain open to potential consolidation
opportunities with appropriate fit
• Seize opportunities to acquire desirable assets
being shed by larger banks
• Define an active pipeline of acquisitions
including larger-scale deals and MOE
• Size and implement strategies to address
EPS regulatory requirements in tandem with
deals
Deals: Is your bank playing checkers while other banks are playing chess? |
9
EY advantage
Financial Services Organization overview
EY maintains a dedicated financial services organization that has repeatedly delivered results for clients across three of our industry sectors:
Banking & Capital Markets, Asset Management, and Insurance.
• Dedicated financial services focus
EY maintains a team devoted to working exclusively on financial
services transactions that brings together all the necessary
industry- and transaction-specific competencies required
throughout all phases of a deal.
• Knowledgeable financial services professionals with informed
transaction methodology and approach
• Our proven transaction professionals are dedicated to the
financial services sector and are knowledgeable of industryspecific challenges.
• Our EY Transaction Advisory Services (TAS) practice is
continually refining our methodology based on industry deal
experience that can be adapted to meet specific client needs and
accelerate deal execution.
• Utilize a collaborative approach to deliver holistic
capital strategies
The TAS practice helps clients execute on all aspects of their
transaction strategies in their capital life cycle, including raising,
optimizing, investing and preserving capital in order to realize
growth and profitability goals.
• Proven ability to deliver results on financial services transactions
Our team has advised clients across all financial services sectors
in achieving desired business objectives through the execution
of various deal types (e.g., M&A, carve-outs, tax-free spins, joint
ventures, initial public offerings), and these experiences allow us to
help others navigate potential pitfalls.
Client value
TAS can help you prepare for a transaction from beginning to end to achieve the following key deal objectives.
Preserve and enhance value
• Our teams use deal experience to surface issues that destroy deal
value so that they can be addressed protectively.
• Our Financial Services transactions professionals are able to assist
clients in articulating, preserving and capturing shareholder value
across all deal types.
• EY financial services integration and separation professionals know
how to navigate execution pitfalls that can prolong the deal process
or create undue exposures.
Designed to increase deal success
• Our teams use a leading-class integrated approach that combines
strategy, financial due diligence, operational due diligence, and
integration/separation planning and execution to increase deal
success.
• EY teams with our clients to enhance their internal competencies
by applying scalable, repeatable and disciplined approaches to
separation and integration processes.
Minimize disruptions and capture deal value
• EY assists clients in implementing a swift and disciplined approach
that allows for the realization of deal synergies through focused
planning, prioritization and execution of strategic initiatives.
• Teaming with EY on transactions allows executive management
to maintain the necessary focus on running the day-to-day
business instead of becoming to absorbed in transaction related
commitments.
• Additionally, leveraging EY’s depth of transaction competencies
frees up capital and resources that our clients can apply toward
other strategic business priorities.
Enhanced credibility
• Our transaction teams enable management to be well prepared for
deal negotiations by surfacing critical information through rigorous
due diligence procedures.
• EY’s proven track record also benefits our clients by exhibiting to
involved counterparties the quality of experience and effort that is
being applied to the transaction process.
• Our clients also reap the reputation benefits of completing a wellexecuted deal.
10
| Deals: Is your bank playing checkers while other banks are playing chess?
EY is the only Big Four organization
with a fully dedicated Financial Services
practice specifically designed to broadly
address the unique issues of the
banking and financial services industry.
Contacts
Nadine Mirchandani
Jack Whitt
FS Transaction Advisory Services Leader
New York
+1 212 773 0090
[email protected]
Virginia
+1 703 747 0256
[email protected]
Aaron Byrne
Principal author
Northeast
Pamela Crawford
New York
+1 212 773 8863
[email protected]
Sharon Dogonniuck
New York
+1 212 360 9242
[email protected]
Dorree Ebner
New York
+1 212 773 0035
[email protected]
Marc Symons
New York
+1 212 773 0796
[email protected]
Southeast
Geoffrey Mize
Charlotte
+1 704 350 9038
[email protected]
Central
Aaron Byrne
Chicago
+1 312 879 4037
[email protected]
West
Rahul Chandarana
San Francisco
+1 415 894 8742
[email protected]
Bruce Kiene
Phoenix
+1 602 322 3344
[email protected]
Deals: Is your bank playing checkers while other banks are playing chess? |
11
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