Financial services valuations market snapshot – Challenging but there are opportunities
June 21, 2016
Nervousness around the global economy and the EU referendum has slowed UK deal activity. A mix of evolving regulation, market volatility and political, macro-economic and currency uncertainty have all converged to slow-down the deals market for financial services businesses and assets in the UK over the last quarter.
We are seeing a changing competitive environment for banks, insurers and asset managers with the rise of challenger banks, alternative finance, insureTech and the trend to investment in alternative, emerging market and early stage assets.
In this pre-EU referendum blog I thought I’d give you a snapshot of the key issues impacting the banking, insurance and asset management subsectors within financial services.
Disappointing bank profitability
Many banks are divesting non-core and capital intensive assets to stabilise their businesses and comply with regulatory requirements such as Basel III and the bank resolution and recovery directive (BRRD). With a few exceptions, bank profitability has been disappointing in 2016 and there continue to be questions about the health of large European banks. New bail-in rules, together with negative interest rates, spooked markets in February. Given the continued depressed outlook of the sector, cost cutting remains high on the agenda.
UK challenger banks, on the other hand, have put in a strong performance in the first half of 2016 as they are less restricted by legal issues and less efficient legacy IT systems. So banking is not dead and now may be an opportune moment to find well priced investment opportunities.
InsureTech emerges as insurance yields decline
Many insurers are assessing the impact of recent and potential future regulatory changes on their business, both in terms of ability to write profitable new business and the impact on their back books.
This has resulted in a significant flurry in mergers and acquisitions (M&A) activity resulting from:
- The impact of Solvency II on capital requirements
- The impact of pensions reform on both back books and new business
- The impact of FCA reviews into life insurers’ back books and, in particular, the impact of exit charges and potential fee caps
- Continued interest from private equity, pension funds and foreign investors, in particular from Asia
- Relatively high return on equity (RoE) making insurance an attractive segment for investors searching for yield.
At the same time, underwriting confidence continues to decline along with investment yields, presenting a medium term ROE challenge for the sector. In response we are seeing some interest in reinventing and disrupting the sector through insuretech from both incumbents and new entrants. This disruption is leading to new start-ups with innovative strategies for customer servicing, investment, underwriting and capital.
Challenges for asset management
Asset management in the UK has seen steady growth in total assets under management (AUM) since 2010. The performance of traditional asset managers has been highly volatile over the past three years due to continued macroeconomic uncertainty, but the outlook remains positive.
For example, retirement patterns across US, Europe and Asia, access to new geographical markets with growing affluent populations and a greater range of products and technical solutions are leading to opportunities. We’ve seen strong interest from trade buyers as a result.
The asset management industry is also being placed under more regulatory scrutiny with the introduction MiFID II, Senior Manager Regime for Asset Managers and the upcoming 2017 regulatory reviews for AIFMD. As a result challenges remain.
What does the future hold?
Despite the worries arising from the global economy, the EU referendum in the UK and evolving regulation we expect to see new opportunities emerging from this uncertainty.
Although the scarcity of well-priced assets, the need to deploy capital and the requirement to divest non-core and capital intensive assets creates significant challenges for many financial services institutions in the UK, it also provides opportunities for businesses who invest in a sustainable and proactive strategy for growth.
In the long term, there continues to be a bright future for financial services in the UK but differences over price, regulatory challenges, lack of strategic ambition and other obstacles mean that only the proactive and the well-prepared are likely to succeed.
Get in touch with me if you’d like to get an understanding of what your business, shares or assets are worth in the context of your transactions, strategic decision making, financial reporting, dispute, tax planning or group restructure.