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M&A Outlook: Australian Financial Services Towards 2030 minterellison.com
Introduction
Welcome to the second edition of the MinterEllison M&A outlook series.
The financial services sector is one of Additional drivers are bringing We have asked
Australia’s most dynamic and innovative transformational change to the financial
industries, and continues to undergo services sector. These drivers include
members of our
transformational change. Set against changes to prudential standards, shifting cross-disciplinary
the backdrop of uncertain economic customer expectations, increased team to share
conditions and the wide-ranging, stakeholder management, technological their key insights
continuing ramifications of the Financial advancements and new competitive and on the future
Services Royal Commission (FSRC), commercial threats.
significant changes in the financial services
direction of the
However, many of these drivers are moving industry. We would Victoria Allen
industry will continue over the short to
medium term as it addresses a myriad of the sector in different directions and there welcome the Partner
will be important trade-offs to be made by
issues. These include a need to restructure, opportunity
market participants over time. This report
address shortcomings in culture and
explores how M&A may be one of the key
to discuss its victoria.allen@minterellison.com
respond to competition from traditional
and non-traditional players. responses to some of these underlying content with you
drivers in the next few years. We explore in more detail.
M&A activity will be one mechanism open how financial services companies might
to institutions in the sector to address the best position themselves for the longer-
collective impact of these issues on the term challenges that lie ahead.
organisation, its business and its reputation.
The recommendations of the FSRC
are a catalyst for simplification, long
term change and an opportunity to re-
establish community trust. The Federal
Budget provided more funding to ASIC
and APRA to increase their enforcement
activities, and for an increased role for Rahoul Chowdry
regulators across the spectrum of financial
services businesses.
Partner, Financial Services
Industry Lead
rahoul.chowdry@minterellison.com
2 M&A Outlook: Australian Financial Services Towards 2030
Contents
Industry Climate: Financial Services at the cross roads 4 Part D Technology 46
Summary of key drivers of M&A 5 Technology as a competitor in financial services 47
Technology as an enabler, with a focus on the customer 52
Part A Short term M&A context and outlook 6 A key enabler in the drive to acquire and retain customers 54
Short term M&A context and outlook 7 Reducing customer friction 55
Recent M&A developments in financial services 11 Personalised offerings using artificial intelligence
Short term predictions 12 and machine learning 56
Divestment of wealth management 17 24/7 capabilities and availability through
multichannel delivery and digital payments 58
Recent international trends 18
Financial reporting 63
Regulatory reporting aided by regtech 64
Part B Long term drivers 21
International drivers in technology 65
Long term drivers 22
Coding error and Australia’s largest ever civil penalty 66
Economic and commercial issues 24
Are branch networks now legacy systems? 67
Funds management and investment platforms 32
Part E Conclusions and Key Contacts 68
Part C Governance & culture, and regulatory issues 33
Towards 2030 – M&A will be an important
Governance & culture, and regulatory issues 34
mechanism for boards and management 67
The FSRC implementation roadmap 37
The BEAR case on potential talent gaps 40
About Us 71
Regulation and compliance costs 41
Marching towards Basel IV 42
Further regulatory changes likely in superannuation 43
Australian regulatory structure and its impact on M&A 44
DISCLAIMER:
(All financial data and figures including share price information is represented as at 31 July 2019 unless specifically noted).
MinterEllison does not represent or warrant that any information provided to you in this document is accurate or complete, or that reasonable care has been taken in the preparation of this document. All information
has been taken from publicly available sources. You must make and rely upon your own evaluation of the information in this document. Except as, to the extent, required by law, MinterEllison will not be liable for any
direct or indirect loss or damage arising in any way out of the use by you of the information in this document. This document is supplied to you on the condition that it and the contents are confidential and must be
kept confidential and not disclosed to any third party.
MinterEllison 3
Industry climate:
Financial services at the crossroads
The final report of the Financial Services Royal Commission will undoubtedly act as a catalyst for the start of a longer term
transformation within the financial services sector. However, it also coincides with the emergence of several other factors that
are likely to also drive significant change within the industry. Some of these relate to issues highlighted by the FSRC, including
changes to governance, culture, remuneration, simplification and the need to establish trust. Other factors include an increased
focus on the customer (assisted by the move to ‘open banking’), technological changes, and increased competitive and
commercial threats.
Competitive factors, regulatory costs and Significant regulatory change is upon us. In addition, market dynamics and This report considers the factors driving
lack of scale will result in M&A being one of Change is occurring not only from new competitive threats are driving changes in change in the sector, as well as setting
the tools that is increasingly considered for regulations, but also from the stronger the sector and providing other reasons for out our M&A outlook. While it is difficult
addressing competitive pressures faced by enforcement of existing regulations. The reassessment by decision makers. Overall, to predict what the changes in the sector
financial institutions. government’s FSRC recommendation the prospects for profitability and growth, will be in the coming 10 years, ‘business
implementation roadmap, the introduction particularly for the larger financial services as usual’ will not look the same as it does
While the short term impact from some of the Banking Executive Accountability players in Australia, look to be challenging. today. It will no doubt be a challenging
of the changes discussed in this report Regime (BEAR), the impact of Open Data Economic and demographic changes environment for management and boards
are more foreseeable than longer term legislation, Productivity Commission including lower inflation, interest rates and to delicately balance responses to the
impacts, the long term impacts are likely to enquiries, changes to banking capital economic growth, high levels of household numerous competing issues facing the
create the greatest need for M&A. requirements (both in Australia, and debt, growing life expectancy and sector. With many companies slow to
Despite solid fundamentals, we anticipate perhaps more acutely, in New Zealand), increasing urban density are all combining recognise the fall in the long term cost of
market conditions are shifting which and increasing enforcement by regulators, at the same time. Institutions are facing capital, it’s an opportune time for M&A, and
are likely to create additional pressures are providing Australian financial services increasing competition from overseas there are many factors that will influence
on financial services institutions. These institutions and investors with new providers and new, nimble and well-funded short term and long term decision making
challenges may create triggers for regulatory and compliance challenges technology driven upstarts, which are in the future.
institutions and competitors to undertake and questions for their business models. delivering powerful customer experiences
strategic reviews. There will be increased onus on boards and and seeking to disrupt the status quo.
management to assist in this transformation
process in a timely fashion.
4 M&A Outlook: Australian Financial Services Towards 2030
Summary Issues Short term impact Long term impact
Extent to which
management can influence
of key drivers Culture and governance n u u
of M&A
Governance and regulatory
BEAR n u u
Regulation and compliance costs u n n
Basel IV n l l
Further regulatory change in superannuation n n l
Focuses on culture and International experience u n l
governance, customers and Increased scrutiny from regulatory bodies n n l
business models are among
NZ regulatory capital changes l n l
the key drivers of M&A which
l u l
management can influence Bigtech
(as highlighted in Figure 1). Fintech u u n
Competition
Neobanks n n n
White labelling n u l
International Players Growth l n l
Open banking l u n
Consolidation n n n
Legacy IT/ageing infrastructure u n n
n n n
Technology
Branch networks optimisation
Customer focus l u u
Digital banking l u n
Artificial intelligence/robo advice l u l
Figure 1 – Key drivers of M&A, impacts High household debt l n l
and extent to which management
Lower credit growth n u l
can influence them.
Economic
Subdued yields n u l
l Low n Medium u High
Overseas funding n n l
Source: MinterEllison
Weaker asset growth n u l
Focused business models l n u
MinterEllison 5
Part A
Short term
6
M&A context and outlook
M&A Outlook: Australian Financial Services Towards 2030
Short term
M&A context and outlook
The market value of banks
stocks has recovered by General Life
8% over the year ending Banking
Insurance Insurance
October 2019 as investor
concerns regarding the
The large Australian general insurers have Even before the FSRC commenced, the CBA’s divestment of its 20% stake in
FSRC abated. This has been seeking to streamline their businesses, Australian life insurance segment had seen Vietnam International Commercial Joint
occurred despite weaker simplify management structures and lift strong M&A activity driven by offshore Stock Bank is the only pure banking
credit growth and falling profitability. Their M&A activity has focused buyers using their lower cost of capital transaction over the last few years. This
house prices, which have on divesting some of their overseas and opportunities to extract synergies follows ANZ making several divestments
operations, smaller portfolios, investments through scale. In 2017 and 2018 the in Asia several years ago. More recently,
lowered top line growth,
in brokers and managing agents, and Commonwealth Bank of Australia (CBA) the major banks have sought to divest
while increasing the claims management service providers. divested its life insurance business to themselves of mortgage brokers. There has
risks within the existing pan-Asian group AIA, Suncorp sold its life been speculation in the press that Suncorp
book of loans. At the insurance business to TAL (a wholly owned will look to divest its banking operations.
same time, banks have subsidiary of Dai-ichi Lite Group, Japan)
and AMP agreed to divest AMP Life to
experienced falling margins
Resolution Life (UK)(a deal which presented
and profitability due to regulatory challenges to complete). 2019
record low interest rates, also saw the sale of ANZ OnePath Life to
increased competition, Zurich (Switzerland). These follow other
increased operational costs significant deals such as the acquisitions
of National Australia Bank's (NAB's) MLC
and rising funding costs.
life insurance business by Nippon Life
(Japan), Zurich's (Switzerland) acquisition of
Macquarie's life business, and Dai-ichi Life
Group's (Japan) acquisition of TAL.
MinterEllison 7
Wealth Private
Management Equity
Wealth management is an important Both history and theory tell us that
area of change for the major banks, with mixing private equity with banking can
most looking to make divestments in this be problematic at times. Both sectors are
area over time. However, these changes highly leveraged, and hence boosting one
are not being mandated by legislation. with the other creates potential alarms for
Changing market dynamics have led regulators. Despite that, there are pockets in
banks to reassess their ownership of the non-bank financial services sector where
investment platforms and financial planning private equity is currently present, including
services, with some deciding to divest shareholdings in ClearView, Pepper, Latrobe
these businesses. AMP’s portfolio review Financial and Latitude Financial.
included the decision to divest its New
Zealand wealth management operations Private equity could foreseeably be
as conditions permit. Westpac has decided attracted to other non-bank institutions,
to continue manufacturing its own with press reports suggesting that Mortgage
investment products. Choice, Steadfast Group and AUB Group
are potential targets. Furthermore, the
We anticipate that banks that retained parts wealth management operations within
of their wealth management businesses banking groups could be equally attractive.
may find future compliance costs will These capital light businesses generate
outweigh revenue. This could see those relatively predictable cash flows and are
businesses come to market as part of a therefore ideal for private equity. Currently
divestment strategy at a later stage. we are seeing the potential for such a tie-
up with global private equity majors being
linked to the potential purchase of NAB’s
MLC business.
8 M&A Outlook: Australian Financial Services Towards 2030
MinterEllison 9
Short term
M&A context and outlook (cont.)
The deceleration of credit growth and the
subsequent fall in property prices has been
Banks have also supplemented their deposit
base by raising wholesale funding (both long
While the fundamental drivers of credit
quality remain currently unchanged,
Despite solid
partially influenced by regulators, with the
Australian Prudential Regulation Authority
term and short term debt) and securitising
existing loans, such as residential mortgages,
high household debt, combined with
the potential of rising unemployment,
fundamentals,
(APRA) introducing a 10% benchmark on
investor loan growth and a 30% cap on
into Residential Mortgage Backed Securities
(RMBS), to make additional loans and take
remain as the largest risks going forward.
Despite solid fundamentals, we anticipate
we anticipate that
interest only loans. Although both have
now been lifted, it is expected that loan
advantage of profitable demand. Much of
the wholesale funding has been raised and
that shifting market conditions are likely
to put additional pressures on financial
shifting market
growth will remain subdued, at least in securitised loans sold overseas. This leads services institutions. The credit cycle may conditions are
the short term, before recovering. Moves to Australian banks’ funding costs being have started to turn, with lenders seeing
to strengthen underwriting have had an partly driven by what is happening to the an uptick in arrears and losses. While likely to put
even greater and ongoing effect. Added cost of funding overseas. This reliance on doomsday scenarios are unlikely, these
to this, APRA is now focusing more on overseas funding may bring its own set challenges may trigger institutions and additional pressures
minimising debt to income ratios and of risks, particularly if the cost of overseas competitors to undertake strategic reviews
keeping low-deposit lending to a minimum. funding rises while the Australian cost of that lead to selected portfolio divestment on financial
The net effect could be a further tightening funding falls. or runoff.
in housing credit, which will continue to services institutions."
constrict some housing market activity and In this climate, it is easier to focus on the
reduce the prospects for price appreciation. short term challenges rather than the
long term opportunities arising from the
The brunt of this low credit growth is current operating environment and the
seemingly being borne by the larger market new ways of doing business being created
participants (and perhaps already reflected by technological advancements. Most
in the fall in the market capitalisations of the importantly, notwithstanding the now
major banks). Smaller players are benefiting long prevailing benign credit environment,
from this environment, with some non- banks are being proactive in managing
bank lenders or ‘shadow-banks’ showing their credit exposures to minimise credit
accelerated loan growth. Major banks now losses. Notably, the majority of employees
need to be best in class in relation to each in these financial institutions may not have
product and market segment. A portfolio seen a recession (which has not occurred
approach will no longer work as some in Australia in 28 years). Therefore, they
smaller lenders target niches. may consequently lack some experience in
managing a downturn.
10 M&A Outlook: Australian Financial Services Towards 2030Recent M&A developments
in financial services
A number of high profile Recent strategic reviews and M&A
processes have been predominantly
and complex M&A driven by institutions seeking to pre-empt
transactions have been and mitigate any additional compliance
completed in recent years requirements and fallout from the FSRC. In
in the Australian financial some respects, the sheer size, complexity
services sector. This trend and poor quality of legacy systems within
our larger financial services institutions
has continued, if not been contributed significantly to the issues
accelerated by the major highlighted in the FSRC. Hence, solving
banks with a number of these inherent problems is not easy and
transactions, some of which will require significant spending and
are yet to be completed. management time.
These transactions are Weaker equity markets and an increase
part of a broader trend to in credit spreads over 1H19 (triggers that
creating simpler businesses. increase the cost of capital for acquirers
and potentially decrease the transaction
They also establish a strong
valuation multiples that buyers are willing
base for buoyant M&A to pay) led some to believe that the peak of
trends to continue. M&A in this cycle may have already passed.
However, aided by the market rebound
in 2H19, and according to Merger Market,
M&A volumes have been robust. There has
been a 7% increase in deal value in FY19 in
Australia compared with FY18. However,
there has been a slowdown in 1H20.
MinterEllison 11Short term M&A predictions
predictions in banking
The sector’s ongoing The bancassurance model may be in trouble The outlook for credit cards is difficult for Australia may spread to New Zealand under
smaller providers the current structure. APRA is now also
response to the FSRC The bancassurance model appears to be
looking to change the capital requirements
facing significant challenges. With growing Credit card operations are businesses of
Final Report, new capital demands and reduced capital scale. There are only a limited number of for holding banks' NZ businesses. This could
regulation and compliance synergies, banks may look to further divest providers with such scale in Australia. Many lead the NZ subsidiaries to modify their
regimes are likely to bring remaining insurance businesses, particularly store cards, smaller banks, and some regional lending appetite, depending on the final
capital requirements. The RBNZ had also
further scrutiny, and those dealing in general insurance. For institutions provide their customers with
initially rejected AMP’s sale of AMP Life to
example, CBA will carve out its general white-labelled credit cards from one of these
behavioural and structural insurance business. providers. Banks are increasingly focused Resolution Life.
change to the sector in the on the profitability of their loan portfolios.
Basel IV looks at total loss-absorbing capital
short term. We envisage A fifth major bank In addition, recent changes to card lending
(TLAC) for banks and puts floors in internal
that a number of changes Long speculated is the idea of a tie-up of standards aimed at restricting the growth in
models for the calculation of risk weighted
regional institutions to form a fifth ‘major card credit limits and outstanding balances,
will occur across segments. bank’. A merger of regional banks, servicing and greater competition from buy-now pay-
assets (RWAs). In other countries, regulators
have looked to Tier 2 and Tier 3 (unsecured
different geographic areas would provide later providers, might lead some providers to
subordinated debt) to boost TLAC. In
greater scale and geographical scope. divest their credit card operations in favour of
Australia, APRA plans to use Tier 2 capital to
Additional acquisitions of smaller banks, white labelling. This will allow them to reinvest
boost TLAC held by Australian banks.
or mutual or credit unions, could address the proceeds into more profitable parts of
any additional servicing gaps. This is similar their business. The proposed RBNZ requirements, which
to the process the major Australian banks propose Tier 1 equity capital rather than Tier
have undertaken over at least the past 35 It is more expensive to do banking in NZ
2 or Tier 3 subordinated debt, would be
years. Clearly the Australian Competition now given increased capital requirements
tougher than Basel IV proposals. This scenario
and Consumer Commission (ACCC) would The Reserve Bank of New Zealand’s (RBNZ's) could create depressing returns and strategic
scrutinise any such proposal. proposal to significantly increase the capital challenges for Australian financial services
requirement proposals for banks could lead institutions operating in NZ. Should the RBNZ
The outlook for auto loan books is to Australian banks strategically reviewing embrace a more stringent standard, Australian
very uncertain their ownership of New Zealand banks banks with subsidiaries in New Zealand
and potentially moving down a path of might consider undertaking strategic reviews
ASIC’s ban of ‘flex commissions’ in the car
divestment. According to a RBNZ discussion and consider all their options for their New
finance market, coupled with a desire to
paper on capital standards, released in April Zealand businesses. These changes have
focus on core operations, may lead some
2019, the regulatory authorities in NZ are already caused Australian banks to review their
of the major banks to review their auto
concerned that systematic banking risks in
loan portfolios.
12 M&A Outlook: Australian Financial Services Towards 2030overall strategy in New Zealand. However, ATMs are potentially going the way of
divestment (other than potentially for first phone boxes
mover advantage) or withdrawal is unlikely. With falling demand for ATM services
The size, nature and pricing of the loan books associated with the increase in card payments
and other activities will inevitably be put under and tools like Apple Pay, the major banks have
the microscope. already removed their ATM fees. We may
see major banks and ATM owners look to
Fintechs are unlikely to take market share
rationalise their ATMs into one or more ‘utility’
from the major banks in the short term
ATM networks (subject to ACCC approval
It is very likely that some existing institutions or authorisation).
will strategically invest in fintechs. Smaller
Despite media reports, the Australian
specialist lending portfolios, based around a
banking market is still attractive to
particular asset class, may see greater volumes
foreign banks
of M&A. This will be partly driven by shadow
banking fintechs operating in niches such as While the Australian banking sector continues
lending to small and medium-sized enterprises, to experience significant problems and
inventory finance, and asset/vehicle finance. the value of banking businesses de-rate
Banks may also reconsider their portfolios in materially, foreign banks may look to increase
these areas given the high capital demands their presence in Australia. One way of
and margin compression driven by increased doing this is to simply acquire Australian
competition. Alternatively, the fintechs in these institutions as a way of cheaply acquiring
segments may be acquired by other fintechs customer relationships and economies of
looking to expand or scale up their offerings, scale. Japanese and Chinese institutions,
or by opportunistic banks that can get niche as well as those from other countries that
providers out of difficulty. For example, have a significant savings surplus and limited
CBA plans to invest more than $5 billion in domestic or existing long term growth
technology over the next five years to maintain opportunities, may identify Australia as an
its leadership position in digital banking. In attractive market.
August it announced a $100 million investment
in Klarna which is a buy now pay later fintech.
MinterEllison 13M&A predictions in
mortgage broking
Seeming casualties of the FSRC, The recommendation that consumers pay
mortgage brokers continue to mortgage brokers, replacing the current
lobby against a recommendation on commission structure, was aggressively
commission structure fought by the mortgage broking industry
on the basis that it diminishes competition.
Historically, mortgage brokers have been These Liberal/National and Labor political
used by banks as a cost efficient way parties have expressed caution or
of sourcing new business, with banks abandoned this recommendation. We
paying trail commissions in the form of a expect that significant political debate on
deferred spotter’s fee. Criticisms of bank any major reforms in this area will continue,
ownership of mortgage brokers had been given that there are over 7,000 mortgage
long building. A Productivity Commission broking businesses in Australia employing
report concluded that many brokers had more than 18,000 people (IBISWorld), with
started acting in the best interests of the many being small businesses.
banks that own them, as opposed to
providing competition to the major banks
as they did in the 1990s. Two of the major
banks noticeably hold mortgage broking
businesses, with CBA already announcing
plans to divest its Aussie Home Loans
business (although now delayed).
14 M&A Outlook: Australian Financial Services Towards 2030M&A predictions
in insurance
The insurance sector may see further Some business units of large insurers There is an unwinding of vertical Now that the FSRC is over, there is
heightened M&A activity in the short term now have increased pressure following integration to claims fulfilment potential for some deals to reappear
the FSRC’s recommendations to prevent
The insurance sector was severely insurance sales alongside the sale of other The general insurance industry has moved The FSRC has resulted in a few M&A
disrupted by the FSRC recommendation to products. towards the vertical integration of claims transactions being delayed or falling
remove grandfathering on both financial fulfilment, through vehicle and property through, such as the terminated divestment
advice and life insurance commissions, plus Insurance brokers and managing agents repairs. This appears to be moving in of St Andrew’s insurance from Bank of
the recommendation to review general are likely to consolidate, but it may not be phases, with insurers acting as the catalyst Queensland to (the now defunct) Freedom
insurance commissions. This, combined a structural change for an increase in scale. This is partly driven Insurance Group. A number of other recent
with growing capital demands and reduced by changes in technology and to drive M&A deals are at risk of being, or have
capital synergies, may see banks further The insurance sector tends to go through efficiencies. As the market responds to been, blocked. Suncorp’s bid to buy Tower
divest their remaining insurance businesses. periods of acquiring brokers and managing match this increase in scale, some general Insurance in New Zealand was blocked by
agents. This is in order to grow its insurers are now looking to divest and the New Zealand Commerce Commission.
The third party insurance sales model is intermediated business and is followed by reduce vertical integration. For example, In a more certain post-FSRC environment,
certainly threatened. Restricting the ability periods of selling these businesses as they Capital SMART Repairs was sold by Suncorp we could see other interested buyers bid
to instigate life insurance sales over the become less critical for business growth. to AMA Group at the end of October 2019. for these assets.
phone will prevent some insurers from This process is likely to continue.
using third party call centres to sell direct
to customer life insurance products.
The FSRC resulted in a few M&A transactions
being delayed or falling through. In a more
certain post-FSRC environment, we could see
other interested buyers bid for those assets.”
MinterEllison 15M&A predictions in
wealth management
Structural separation from the banks is their customers with the options they commissions). Press reports suggest Productivity Commission reports, APRA
likely to occur over time need. However, Westpac has exited from these businesses are pricing at between may become far more aggressive in
financial planning. 3–3.5 times recurring revenues, or seeking the closure of underperforming
CBA has already sold Colonial First State 6–7 times normalised EBITDA. superannuation funds or their merger into
Global Asset Management to Japanese ANZ sought to sell its OnePath wealth other, more successful funds.
giant Mitsubishi UFJ Trust and Banking, management operations to IOOF, Potential liabilities associated with some
and its financial planners to CountPlus. completing the sale of its financial planning financial groups may limit M&A activity, Similarly, funds management is an area
It is separating its remaining wealth business. However, APRA’s concerns with but there are solutions where scale will remain ever more
management (less the already divested IOOF have delayed regulatory approvals. important as investors continue to demand
funds management and financial planning APRA’s sanctions against IOOF may see the Given the potential professional indemnity lower management fees. In areas such
operations) and mortgage broking transaction further delayed. liabilities associated with inappropriate as exchange traded funds (ETFs) or active
business into a separate business dubbed financial advice and fees for no service, management, we expect that funds
‘NewCo’. CBA has confirmed that its There are opportunities for M&A in it is possible that some smaller financial failing to reach acceptable scale may be
Financial Wisdom licensee will be closed financial planning given the turmoil planning organisations might look to divest increasingly shut down or merged into
and no longer offer licensing services by caused by the major banks the back book of their operations. These other funds.
June 2020. ‘run-off liability companies’ could then be
At the smaller end of the market, financial rolled up in a series of M&A transactions, An example of the recent changing activity
NAB has stated that multiple options for planning businesses looking to grow similar to the process used by the insurance in this space is the signing of a non-
its wealth management business remain will have many opportunities to acquire industry to transfer run-off liabilities from binding memorandum of understanding by
under consideration, including an initial businesses that are being divested by the closed insurance books. VicSuper and First State Super to explore
public offering, sale or demerger. majors. There appears to be particularly the benefits of a merger. This would make
strong buyer interest in advisor groups Increased consolidation is likely in super the resulting fund the nation’s second
Westpac has made the decision to where the clients are well engaged and and funds management largest behind AustralianSuper.
continue manufacturing its own investment pay good ongoing fees (as opposed to
products, believing that this path gives those businesses that rely on conflicted As a result of the FSRC recommendations,
the group greater control in providing remuneration models and trailing the APRA Capability Review and
16 M&A Outlook: Australian Financial Services Towards 2030Divestment of
wealth management
There is no greater example of the (c) Conflicts of interest between Figure 2 – Market share of wealth management/financial planning in Australia (2018)
changes happening in the market than customers' best interests and staff
the efforts by Australia’s major banks incentives; 20%
to divest their wealth management (d) the airing and scrutiny of high-profile
activities. The days where the big four case studies of internal misconduct by 15%
banks and AMP controlled 80% of the financial planners and the management
Australian wealth management industry impost to fix such misconduct;
have gone. Figure 2 and Figure 3 highlight 10%
the current market share positions in (e) increased competition from the not-
wealth management but this market for-profit industry super funds;
concentration will change rapidly. (f) increased regulatory pressures 5%
such as the MySuper legislation,
The FSRC did not directly address the which forced institutions to offer 0%
future of the vertically integrated business simple, low-fee accounts for new AMP ANZ CBA NAB WBC IOOF
model. However, this model is now under superannuation customers; and the
severe pressure and most of the larger source: Money Management Magazine.
Freedom of Financial Advice (FOFA)
players in the sector have, through actual legislation, which banned commissions
or planned divestments of their wealth Figure 3 – Market share of retail funds under management in Australia (2018)
on financial products (apart from
management and/or insurance businesses, insurance); 20%
signalled their intentions to simplify their
business models. Contributing factors (g) anticipated enhanced regulation and
have included: associated cost to professionalise
15%
services and conduct, and improve the
(a) the banks, in particular, becoming products available to end consumers;
progressively more circumspect with 10%
the wealth management business and (h) greater management time and
seeing more effective use of capital; responsibilities (under BEAR) for a small
proportion of its overall business; and 5%
(b) lack of customer demand to using their
local bank branch as a ‘one-stop-shop’ (i) the need to overcome negative
for their investment, superannuation reputational and share price impacts. 0%
AMP WBC/BT CBA/ NAB/ ANZ Macquarie IOOF
and insurance products;
Colonial MLC Wealth
source: Plan for Life.
MinterEllison 17Recent international
trends
International M&A activity International trends by sector
in the financial services
sector has shown some
interesting contrasts Banks Asset managers
over the last 12 months.
Deal making between
banks continues to be Deal making in the banking sector has been subdued for the A record was set in 2018 for deal making in the asset management
sluggish, while transactions last decade. This is due in large part to the stricter regulatory segment. Acquirers have been attracted to the discounted
regimes that have been put in place since the Global Financial valuations through the segment, which dropped to their lowest
involving asset managers
Crisis. In addition, regulators and governments have in many level in seven years through 2018. The median valuation for
and insurers have instances effectively barred mega bank deals amongst the largest publicly traded asset management companies – measured as
increased. international and national banks. the enterprise value multiple to earnings before interest, tax,
depreciation and amortisation (EV/EBITDA) – was about 6.2
However, since US President Trump has come into office, US times last year, well below the peak of 11 times registered in 2011.
bank rules have loosened considerably, leading some to predict a Interestingly, valuations of privately owned asset managers have
pickup in deals, particularly as smaller banks look to consolidate. maintained valuations of about 10 times over the last five years.
In February 2019, US regional lender BB&T Corp acquired another With the trend towards low cost industry funds appearing to
US regional lender SunTrust Bank for $US28.2 billion, creating be a secular shift, traditional active managers have used cost
the sixth largest US retail bank and making it the largest US bank cutting measures to try to stay profitable. This combination of low
merger since JPMorgan’s acquisition of Bank One in 2004. valuations and cost out opportunities has also seen significant
Technology has been mentioned by the bank’s executives as the private equity interest, which in turn may be an attractive option for
main impetus for the deal. The pooling of resources will allow the asset managers as it provides them with an escape from the glare
companies to develop better digital offerings. of seasonal earning cycles.
In Europe, Deutsche Bank was unable to reach a deal with
prospective partner Commerzbank and has since embarked on an
aggressive restructure of its operations, shedding its Asian equities
businesses and downsizing its investment bank.
18 M&A Outlook: Australian Financial Services Towards 2030Insurance
The pace of global insurance M&A was
robust through 2018, up 9% from 2017,
with 382 completed deals. This included
18 $US1 billion+ mega deals, such as AIG’s
$US5.5 billion acquisition of Validus, and
Axa’s €12.4 billion acquisition of XL Group.
Despite these numbers, mega deals are still
difficult to complete, as evidenced by the
collapse of SoftBank’s proposed acquisition
of a stake in Swiss Re.
MinterEllison 19Recent international
trends (cont.)
International regulation driving change
Easing up on Europe’s banks Canada strengthens
midsized US Banks face new rules standards
In November 2018, the US Federal Reserve Ten years after the financial crisis, the The new rules also required large foreign In 2018, the Canadian Office of the
said that it wanted to ease regulations for regulatory revolution continues for banks to set up intermediate parent Superintendent of Financial Institutions
US lenders with less than $US700 billion European banks. The past year has seen undertakings that would bring their (OSFI), implemented changes to mortgage
in assets, as a way to lessen the burden reforms passed which will open up EU operations under a single holding underwriting standards, creating a stress
on big commercial lenders that do not European banking to more competition, company. The move effectively mirrors US test for borrowers making a down payment
have volatile Wall Street businesses. Under tighten rules on trading, dent reported rules and is seen as crucial to protecting exceeding 20%. This will require banks to
the proposal, midsized lenders would profits and boost capital requirements. the bloc’s financial stability against risks increase their loan-to-value ratios, which
face lower liquidity and compliance Taken together, these changes should also posed by major banks. will be strictly enforced by OSFI.
requirements, while smaller banks would make Europe’s financial system healthier.
get even easier treatment. Concerns are still held that the ‘Too Canada’s banking regulator also increased
European Union (EU) finance ministers Big to Fail’ problem persists in Europe. the amount of capital that its biggest
The proposal stems from a law the were able to reach agreement on Since 2008, the five largest banks in the lenders must carry, to protect them against
US Congress passed in May that reforming bank capital rules, a major step Eurozone have increased their share of the risks at home. Regulators pointed out that
ordered the Federal Reserve to reduce towards boosting the bloc’s financial total assets of the entire banking industry despite positive credit performance and
regulatory burdens on community and stability and a stepping stone towards a from 44% to 48%. Critics argue that implicit generally stable economic conditions,
regional lenders. deal on a backstop for its bank rescue subsidies for ‘Too Big to Fail’ banks remain now is a prudent time for banks to build
fund. The accord came after 18 months in place as well. Since creditors continue to resilience against future risks to the
of heated debate among the 28 EU believe that those banks would get bailed Canadian financial system.
governments on how to apply new global out in a crisis, they can borrow at lower
bank capital rules. interest rates than smaller banks.
Under the accord, European banks will
have to abide by a new set of requirements
aimed at keeping their lending in check and
ensuring they have stable funding sources.
20 M&A Outlook: Australian Financial Services Towards 2030Part B
Long term
drivers
MinterEllison 21Long term
drivers
The financial services
sector has and will Regulatory &
continue to be a key Competition Technology
stakeholder
pillar of the Australian
economy, and an enabler
Ongoing changes to international and local We're likely to see new competition from We're seeing greater customer expectation
of productivity, jobs regulatory and compliance conditions are nimble, agile and sophisticated companies, for customised, agile and on-demand
and economic growth. inevitable, including to banking capital especially those with smart technology systems, coupled with ongoing
However, we anticipate requirements, banking executive offerings. This would result in shifts in advancements in technology solutions,
that a number of longer accountability, open banking, tightening of market share and power, and the formation especially in quantum computing. This will
social responsibility, culture, reputational of more strategic alliances among result in further outlays to upgrade ageing
term changes will see the
and shareholder priorities. The impact may traditional players wanting to stay relevant. infrastructure and systems just to 'remain in
sector look fundamentally be further regulatory and remediation cost the game'. Part D provides further insights
different by 2030. It is here cutting into profit margins and potentially about this driver.
that we see the greatest market value. Non-core business units
opportunities and need might be divested and we might see
fundamental institutional shifts towards
for M&A.
simplified operations, and possible
consolidation and market concentration
by astute buyers.
We’re seeing a number of other
interrelated and coordinated
forces that will drive longer
term change in the sector.”
22 M&A Outlook: Australian Financial Services Towards 2030Economic
Shifting economic conditions, especially
from the current and expected prolonged
low interest rate environment, and also
leverage risks, will result in different credit
and operating conditions.
MinterEllison 23Economic and
commercial issues
Taking a long term view, Fall in financial services market value
despite a solid base, market
conditions are shifting. In 2018 and early 2019 there was a (a) the FSRC; (e) market uncertainty and volatility due to
significant reduction in the collective international market and concerns;
When combined, they are market value of Australian financial
(b) actions by regulators to slow
likely to create additional services institutions, which has since partly
investment and interest-only (f) moves by APRA to slightly ease new
lending growth; mortgage stress test requirements;
pressures on financial recovered. This is highlighted in Figure 4.
(c) weaker credit growth and falling (g) APRA’s timetable for revisions to the
services institutions. While
A confluence of factors have led to this house prices; capital framework for authorised
doomsday scenarios are reduction and then recovery in market deposit-taking institutions (ADIs); and
(d) falling margins and profitability
unlikely to eventuate, these value. These include: ratios due to competition, increased (h) interest rate cuts by the RBA.
challenges may create operational costs, and rising
triggers for institutions and funding costs;
competitors to undertake
strategic reviews.
Figure 4 – The reduction in market value of ASX200 financial service sector (January 2018–November 2019).
Banks (Big 4 plus BEN, BOQ, CYG & GMA) Insurance (SUN, AM, IAG, QBE, MPL, NHF, SDF)
440 75
FSRC Final Report FSRC Final Report
428
420
425
423
71
70
421
419
70
413
411
408
68
68
400
$Billions
405
$Billions
402
67
400
399
408
66
66
65
395
394
393
65
65
65
65
387
64
64
380
385
64
64
383
63
63
62
373
372
371
61
60
360
60
364
59
359
58
340 55
Aug-19
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Sep-19
Oct-19
Nov-19
Aug-19
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Sep-19
Oct-19
Nov-19
source: Start of month market capitalisations, ASX200List.com, accessed 20 November 2019.
24 M&A Outlook: Australian Financial Services Towards 2030– The market value of bank stocks has fallen 16% in the
last year or ~$70 billion
– The market value of insurance stocks has fallen 17% in
the last year or ~$14 billion
– The market value of diversified financials has fallen 7% in
the last year or ~$5 billion
– The total decline in market value for larger Australian
listed financial services stocks is approximately $90
billion or ~15%.
Diversified financials
(ASX, CCP, CBG, ECX, IFL, JHG, MFG, MOG, PDL, PPT & PTM)
100
99
FSRC Final Report
97
95
96
96
95
94
94
94
93
93
92
92
90
91
91
90
90
$Billions
89
89
87
85
83
82
80
80
78
75
70
Aug-19
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Sep-19
Oct-19
Nov-19
source: Start of month market capitalisations, ASX200List.com, accessed 20 November 2019.
MinterEllison 25Economic and
commercial issues (cont.)
Challenges to credit growth
Currently in Australia, banks are facing The deceleration of credit growth has Although the 10% benchmark was lifted The net effect could be further tightening
an undeniably challenging credit growth also been influenced by regulators. In late from 1 July 2018, and the 30% cap was in housing credit, which will continue
outlook, which is largely being driven by 2014, APRA introduced a 10% benchmark lifted from 1 January 2019, the likelihood to constrict housing market activity and
the slowdown in the home loan market on investor loan growth. Investment of a quick rebound in housing credit reduce prospects for price rises.
(represented in Figure 5 by housing finance lending volumes as a proportion of total remains low. The 30% cap on interest-only
commitments and investments), especially lending volumes for household finance lending had a much more broad-based
in the last 12 months. This weakening in peaked at 44.4% in May 2015, just after dampening effect on investor activity.
housing credit is a product of economic APRA’s imposition of investment lending Moves to strengthen underwriting have
and market fundamentals, namely slower 'speed limits'. In March 2017, APRA also had an even greater and ongoing effect.
economic growth, low inflation and implemented a cap on interest-only lending Added to this, APRA is focusing more on
overextended property prices. at 30% of all new mortgages, which has minimising debt to income ratios higher
led to a substantial drop in demand for this than six times and maintaining a focus on
product (largely used by investors). keeping low-deposit lending to a minimum.
This weakening in housing credit is a product of
economic and market fundamentals, namely slower
economic growth, low inflation and overextended
property prices."
26 M&A Outlook: Australian Financial Services Towards 2030Figure 5 – Housing finance commitments (1985 to now)
45
Housing finance commitments
45% Banks are facing a
40 40% challenging credit
growth outlook,
35 35%
which is largely
30 30% being driven by the
slowdown in the
$ billions
25 25%
home loan market."
20 20%
15 15%
10 10%
5 5%
0 0%
Owner occ upie d (LHS) Investment housing (LHS) Investment % dwell lings (RHS)
source: ABS 5671.0 Table 8, Seasonally adjusted data, aggregated into owner occupied and investment categories, http://bit.ly/2OkMu9r, accessed 22 January 2019.
MinterEllison 27Economic and
commercial issues (cont.)
As Figure 6 highlights, system-wide housing Figure 6 – Shifts in non-bank lending
credit growth in Australia has slowed Housing credit growth in Australia (year on year) Non-bank market share of financial commitments
over the last year due to the restrictions
imposed on APRA regulated banks. In this 20% 30%
environment, the non-bank lenders or
15%
‘shadow banks’ have stepped in and are 25%
now showing accelerated loan growth. 10%
Furthermore, as overall credit growth has 5% 20%
slowed, some banks have been more 0%
affected than others, most notably ANZ. 15%
Recently released APRA stats for June 2019 -5%
show that ANZ’s owner-occupied home
-10% 10%
loan market has declined dramatically,
by 0.75%, in the past year to 15.65%. This -15%
5%
is the largest one‑year fall recorded by
-20%
APRA in relation to the big four banks. In
February 2019, ANZ Chief Executive Officer, -25% 0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Shayne Elliott, conceded that the bank had
become too conservative in its home loan Non-bank Bank
approval process. sources: APRA, RBA. source: ABS.
28 M&A Outlook: Australian Financial Services Towards 2030Figure 7 highlights that growth rates in Figure 7 – Credit growth in Australia (year on year) Figure 8 – Median house price changes 2018
other forms of credit, such as business and
personal credit, have also been slowing
alongside housing. 25% 10% 8.8%
Figure 8 also highlights that tighter credit 20%
assessment and availability has led to 5%
declining housing prices, particularly in 15% 1.7%
Australia’s largest cities. There has been less 0.0%
of an impact in other smaller capital city 10% 0%
-0.1%
markets (where the Household Expenditure
Measure may not be as distorted as it is in 5% -3.3%
-5%
the Sydney and Melbourne markets).
0% -6.5%
-10% -8.7% -8.4%
-5% -9.9%
-10% -15%
2005 2008 2011 2014 2017 2020
Housing Personal Business
source: RBA. source: Domain Group.
Tighter credit assessment and availability has led to declining
housing prices, particularly in Australia’s largest cities.”
MinterEllison 29Economic and
commercial issues (cont.)
Asset and liability mix/
funding mix Figure 9 – Funding composition of Australian banks through time
70%
One driver of rising funding costs is the
funding composition for Australian banks, 60%
which is a function of the deposit to loans
ratios (DLRs). These were improved to 50%
just above 60% with the implementation
of the Basel III standards. Banks have 40%
supplemented their deposit base by raising
wholesale funding (both long term and 30%
short term debt) and securitising existing
loans such as residential mortgages into 20%
residential mortgage backed securities
(RMBS) to make additional loans 10%
given profitable demand. This funding
composition is highlighted in Figure 9. 0%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
The majority of wholesale funding has
been raised and securitised loans sold
Domestic Deposits Short-Term Debt Long-Term Debt Equity Securitisation
overseas, which leads to Australian banks’
funding costs being partly driven by what is
happening to the cost of funding overseas.
sources: APRA, RBA, S&P
Australian banks are likely to have rising
funding costs, despite interest rate stability
in Australia, as the US looks to increase
rates and other markets linked or pegged to
the US dollar implicitly follow suit.
30 M&A Outlook: Australian Financial Services Towards 2030Banking in a low interest rate world Figure 10 – Low interest rates in leading developed markets
Central Bank policy rates
Over the last decade, low interest rates Low interest rates for long periods bring 8%
have become a permanent feature other challenges. For example, low rate 7%
throughout the economies of the environments reduce bank profitability, as 6%
developed world (as highlighted by net interest margins are compressed. At 5%
Figures 10 and 11). the same time, investors (both retail and 4%
institutional) can be pressured to increase 3%
This unprecedented period of loose their risk exposure to start chasing returns. 2%
monetary policy has been driven by The dangers of increasing risk exposure 1%
the need to nurse economies back to a are often not apparent in a benign 0%
path of growth after the Global Financial environment. GFC
-1%
Crisis. Although we have seen economies 2005 2008 2011 2014 2017 2020
stabilise, and in some cases stage robust Banks are being proactive in managing their Australia US Japan Euro area UK
recoveries, the policy experiment of ultra- credit exposures to minimise credit losses,
low rates and quantitative easing has not in part prompted by APRA. During a benign source: RBA.
been without consequences. Side-effects credit environment, it can be difficult to
are now apparent in asset prices, which determine where credit exposures could Figure 11 – Low long term interest rates in Australia
in many instances, have been increasingly deteriorate, and, given the economic
stretched from underlying fundamentals. uncertainties, it would be brave to predict 18%
Australian 10 year yields
This was most visible in the US stock too far out. However, the fundamental 16%
market, but also extends to other corners, drivers of credit quality remain unchanged, 14%
such as private equity. In Australia, the with high household debt combined 12%
impacts of the global debt binge seem with rising unemployment (resulting in
10%
most apparent in residential property. households being unable to service their
8%
debt) producing the largest risks.
6%
4%
2%
0%
1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019
source: RBA.
MinterEllison 31Funds management
and investment platforms
As Figure 12 highlights, Australia’s Over the past couple of years, we have Figure 12 – Australia’s projected superannuation assets ($ trillion)
superannuation asset pool is expected seen a huge exodus of funds away from
to grow from $2 trillion to $9.5 trillion the traditional giants of the Australian 10
by 2035. This significant change in the wealth management sector, and into the
landscape will have a long term impact on lower cost industry super funds. A key
M&A in the sector. question that looms for 2020 and beyond 8
is whether this switching has been a
In Australia, next generation specialist reaction to the negative headlines from
platform providers, such as Hub24, the FSRC, or whether other forces are at 6
Netwealth and Praemium offer their play. We believe the broader global theme
services to independent financial planners. of lower cost (often passive) investment
These specialists have already captured 4
managers winning funds off higher cost
significant market share of net funds flows legacy providers, is set to continue playing
into investment platforms, and are quickly out with no end in sight.
growing assets under management. 2
They are challenging existing platform
operators by offering greater functionality,
0
flexibility and accessibility. Their growth
2020 2025 2030 2035
has been further aided by the brand
damage large wealth management
businesses experienced due to the
misconduct revealed by the FSRC. source: Austrade.
32 M&A Outlook: Australian Financial Services Towards 2030Part C
Governance & culture,
and regulatory issues
MinterEllison 33Governance & culture,
and regulatory issues
Since the Global Financial
Crisis in particular, the
Australian financial
services sector has seen an
increase in global and local
M&A due diligence processes will become Increased governance considerations will Remuneration changes are unlikely
regulatory scrutiny. While more onerous most likely slow M&A to drive M&A activity, but may be an
some significant regulatory important qualitative consideration in
and compliance changes Acquirers will undoubtedly increase With the Treasurer required to approve how a deal is structured
their due diligence as a direct result of M&A deals in the financial sector, there is
will occur in the aftermath the FSRC, and may also seek increased good reason to anticipate that governance If remuneration changes limit incentive
of the Financial Services levels of warranties and indemnities from considerations will be relevant to approval. pay or change its structure, it could impact
Royal Commission (FSRC), vendors. In addition to financial due Given the recommendations of the FSRC, if how M&A is structured for both boards
financial institutions face diligence, companies may wish to consider regulators voiced concerns to the Treasurer and management. Increased emphasis on
a number of regulatory undertaking more thorough regulatory and around an organisation's governance, they long term incentives under APRA’s BEAR
cultural due diligence to prevent inheriting might be sufficient to affect the course regime, consistent with those discussed
pressures as a result of or acquiring any regulatory, legal or of the proposed transaction. Governance in the final round of FSRC hearings with
measures designed to make compliance liabilities. concerns appear to be delaying the Macquarie Bank, might actually lincrease
them more resilient, and completion of the acquisition of OnePath's M&A if any changes encourage boards and
accountable to customers, Pension and Investments business by IOOF. management take more calculated risks.
which may drive
transformative structural
change in the sector.
Part C written by:
Mark Standen
Partner
mark.standen@minterellison.com
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