The M&A trends driving Luxembourg’s banking sector

in Industry Insights, 12.06.2019

This article was written together with Krasen Monovski.

The banking market in Luxembourg has recently seen a surge in deal activity, with a multitude of strategies employed by buyers and sellers alike. While this industry is robust and well-positioned for growth, there is nevertheless significant pressure on firms to improve profitability and innovate service offering. This article, drawing on data from a recent KPMG survey, will examine which drivers will determine the dynamics of the M&A activity in the near future.

(For even more analysis, see KPMG International’s new trends report on global banking M&A).

Corporate development teams are on the rise

During the study, we visited major banks across the globe and asked their corporate development heads about growth agendas, M&A strategies, fintech, and data and analytics. We also looked into the significance, skills, and changing roles of corporate development teams.

What we found is that many (53%) of corporate development teams have remarkably raised their standing within their banks in the past five years, and have an increasing influence over board decisions. In particular, they have a very important role in supporting growth and the digital agenda, working shoulder to shoulder—or sometimes competing—with new internal innovation and technology divisions to identify and close in on fintech targets.

In broader terms, the international outlook on transactional activity remains rather bullish: 80% of banks said they are planning buy-side deals in the next three years, while 68% anticipate sell-side deals. Banks in Europe, however, remain more focused on balancing existing portfolios and exploring means of organic growth. Indeed, in recent years, we have observed a wide variety of transactional drivers and strategies being applied in the Luxembourg banking market.

Recent transactional activity in Luxembourg

The landmark transaction over the past 18 months was Legend Holdings’ acquisition of 89.9% of Banque Internationale à Luxembourg S.A. from Precision Capital (the consideration implying an equity value of €1.65 billion). This further reinforced the presence of Chinese banks, which are now thirteen in total—the third most in the country. Some of the other big Chinese names, many of which actually started as greenfield operations, include ICBC (the world’s largest bank), Bank of China, Bank of Communications, Agricultural Bank of China, China Construction Bank, China Merchants Bank, and China Everbright bank.

A number of other non-EU banks, amid Brexit talks and developments, have also recently set up or scaled up existing operations in Luxembourg, choosing it as a hub from which to access the EU market. Swiss banks have been particularly active here, with UBP acquiring Banque Carnegie Luxembourg S.A. in mid-2018 and UBS acquiring the private banking business of Nordea earlier that year. Swissquote Bank and Safra Sarasin also acquired interesting assets in Internaxx Bank and Banque Hapoalim respectively. The common denominator behind these acquisitions? The Swiss banks now see Luxembourg as their EU hub to attract EU private capital.

Luxembourg is well known for, and continues to offer, a stable political framework as well as business-conscious regulatory and fiscal policies for its financial sector. These factors, combined with the country’s EU passporting capabilities and its triple-A ratings from S&P, Moody’s, and Fitch, remain important in boards’ and corporate development teams’ decisions to establish new operations (or expand existing ones) in Luxembourg.

Other recent transactions have been driven purely by strategy, for instance when ABN AMRO decided to sell its wealth management and insurance activities in Luxembourg to BGL BNP Paribas in early 2018. The same core-market refocus argument was brought forward by several Nordic banks when disposing their assets with Skandinaviska Enskilda Banken, Catella, and Ohman, to name a few.

The outlook of transactions in Luxembourg

Profitability, as well as the critical scale needed to operate on the Luxembourgish market, will remain important transaction considerations. Banks will continue being asked about profitability by shareholders, regulators, and the financial market generally. Private banks, for instance, are facing this question due to pressure on margins for discretionary portfolio management, mounting regulatory and compliance costs, the persistent negative interest rate environment, and a shift in portfolio structure in the last two or three years towards HNWI and UHNWI, which tend to deliver relatively lower margins. The critical mass of operating in the private banking sector, which used to be €1bn not so long ago, is now perceived on the market of being north of €5–7bn. All these factors further fuel the sector’s need for consolidation: improved scale and synergy as well as access to new client segments, geographies, and demographics are what will help maintain and grow profitability.

Banks of all kinds are seeking technological advancements to help keep raising cost bases at bay. One solution for private banks would be to use more robo-advice for their affluent client segments. Generally, in our experience, acquiring fintechs seems like a particularly popular way for small to mid-size banks to catch up quickly on the digital agenda, rather than developing capabilities internally which tends to be the preferred, but certainly not the only, option for many of the largest players.

Similarly, the banks serving the fund industry are increasingly depending on technological and lean processes to maintain their competitiveness in the passive investment/low-fee world that we live in.

The negative interest rate environment (while it lasts) and continued regulatory pressure (Basel IV, IFRS 9, PSD2, GDPR, and MiFID II, to name a few) have also put banks’ financial positions under enormous pressure. As a result, transactional activities are often under consideration as a possible remedy.

The Luxembourg picture

It’s truly impressive to see the Luxembourg market so closely aligned with the global trends as captured by our Trajectory of transactions study. Indeed, the study’s main finding is refreshingly relevant to us in Luxembourg, summarizing all of the trends we have just discussed:

“These days, there is no single, common path among the banks. Unlike during the pre-crisis years, when most banks seemed eager for growth across their businesses and geographies, today each institution has its individual DNA, and a distinct level of interest in growth—by organic or inorganic means, cost optimization, or portfolio balancing.”

At KPMG Luxembourg we have a dedicated M&A and financial due diligence team specializing in financial services transactions. We have a substantive track record of assisting and advising boards, corporate development teams, and private equity houses on transactions in the banking sector. We are also part of the Global KPMG Financial Services Deal Advisory network and are leveraging on its unique people, market insights, and tools. Visit our website for more information.

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