Snapshot for week beginning 3 January 2021. The banking sector ushered in the new year with a raft of major deals. In value terms, debt offering (17.8bn), venture financing (562m), and acquisition (207m) are leading the way.
The lion’s share of the transactions is taking place in North America (15). This is followed by Asia-Pacific (13), with Europe (4) and South and Central America (1) trailing.
Emerging from a year that has upended the rules of the game, banks are gearing up to invest in technology. This would allow them to realise cost savings and increase efficiency.
To meet the need for such investments in a low interest rate environment, some banks, especially smaller ones, may pursue mergers and acquisitions (M&A) opportunities for scale, according to a recent Deloitte survey.
Among respondents from smaller banks (annual revenues between $1bn and $5bn), 57% said their institutions could pursue M&A opportunities over the next 6–12 months. One-third of respondents said their banks may also look at rationalising assets or divesting noncore operations.
As the new year begins, US venture capital firms have been particularly active. They were involved in seven of the North American transactions.
However, the biggest action of the week was in Asia-Pacific.
Chinese giant CITIC set to sell $1.2bn of bonds
In the biggest deal of the week, CITIC Securities, China’s largest brokerage firm, won regulatory approval to sell 80bn yuan ($1.2bn) of bonds over two years.
The bond sale will be on top of a planned offering of 30bn yuan of subordinated debt approved in September. A previous 50bn yuan of corporate bonds was approved in May.
The Beijing-headquartered firm offers a variety of financial services.
The company’s services include investment banking, corporate development financing, securities brokerage, trading securities, proprietary business, and securities investment consulting.
Last September, CITIC Securities was tapped for an underwriter’s role in the Chinese financial technology firm Ant Group’s IPO of up to $30bn.
Meanwhile, US banks are beginning to garner real excitement.
Dealmakers warm to US banks
In recent years, investors have reacted coolly to bank mergers. They were put off by the big premiums paid for targets.
Increasingly, however, banks are doing low- or no-premium mergers of equals. A good example is the $28bn BB&T-SunTrust deal of 2019, which created Truist.
In December, Huntington Bancshares agreed to buy TCF Financial for about $6bn, a small premium. This took the total volume of deals in 2020 to $32bn, in line with recent years’ totals, despite the virus.
The final catalyst is rising interest rates and a steepening yield curve. This means a bigger gap between short and long-term rates. A steeper curve means higher profits. For it increases the difference between banks’ cost of funding and what they earn by lending.
Both the release of pent-up economic demand, as the pandemic eases, and supportive monetary policy bode well for the sector.
On the cusp of a major opportunity
The resurgence of the banking sector is by no means limited to the United States. In a new report about global banking, London-based consulting firm Ernst & Young (EY) argues:
There is “a once-in-a-generation opportunity caused by the pandemic. It gives banks a chance to accelerate transformation in order to grow, cut costs, connect with customers and drive a more sustainable future.”
The researchers contend that “2021 must be about seizing the opportunity to transform. This can be done by accelerating investments in technology and embedding agile and scalable business models”.
Deals—especially M&As and join ventures—provide the means (finance, technology, know-how) by which banks can “turn today’s disruption into tomorrow’s transformation,” as the report noted.