UK financial services sector on track for wave of consolidation

A race to gain market share, a period of relative political calm, and renewed economic stability are fueling M&A in the sector

Dealmaking in the global financial services sector posted an uptick in activity during the first quarter of the year. This rebound is especially significant given the market headwinds the sector has faced over the past few years. Persistently high interest rates, macroeconomic volatility and tough financing conditions saw 2023’s annual deal value sink to its lowest figure in six years.

Yet a flurry of big-ticket deals announced in Q1 2024 highlight renewed optimism in the industry. Indeed, three of the top ten global deals across industries in this period were in the banking sector. Furthermore, the US$97.5 billion in aggregate value for global financial services deals in the first quarter represents a 60 percent year-on-year increase.

The UK market, in particular, witnessed a marked increase in M&A activity last quarter, with US$7.2 billion spent across 50 deals. Not only is this a fourfold increase in value year on year, but also the highest quarterly figure since Q1 2022—before spiraling interest rates triggered caution across the UK deal market.

Consolidation fuels big bank M&A

Globally, dealmaking in the retail banking industry was a key driver behind Q1 activity. The subsector was responsible for US$50.2 billion of deals—over half of the value targeting the wider financial services industry.

This impressive figure was largely due to US-based Capital One’s landmark takeover of rival lender Discover Financial Services. Valued at US$35.3 billion, the tie-up was the largest strategic deal to take place during the first quarter.

In the UK, the retail banking subsector has also been a key growth engine for financial services M&A. High-street banking giant Nationwide grabbed headlines in March with its landmark purchase of rival Virgin Money. The US$3.6 billion all-cash deal represented the UK’s biggest banking merger since the financial crisis. If the deal completes, it will create the UK’s second-largest savings and mortgage provider, with combined assets of US$459 billion.

The deal highlights Nationwide’s ambition to challenge the UK’s four biggest high street lenders—HSBC, Lloyds, Barclays and NatWest—increasing its share of the mortgage market from 12.2 to 15.7 percent.

UK banks race to consolidate 

The Nationwide takeover is the most high-profile in a series of deals that could spark a larger wave of consolidation across the UK banking sector. The first of these took place in July 2023, when Newcastle Building Society announced its merger with its Northern counterpart, Manchester Building Society.

In November, Metro Bank was in exclusive talks to sell its US$3.8 billion mortgage portfolio to UK high street giant Barclays, but negotiations fell apart after Metro secured a multimillion-pound rescue deal at the end of the month. The new controlling shareholder, Jaime Gilinski Bacal, has said the bank will begin exploring acquisitions of its own.  

Meanwhile, in a sign of supermarkets retreating from the banking industry, Barclays acquired UK supermarket Tesco’s retail banking business for US$760 million. An ongoing trend of supermarkets disposing of their retail banking arms and concentrating on their core competencies will offer more deal opportunities in the near term.

The string of big-ticket deals could prompt a wave of further consolidation as rival challenger and mid-tier banks struggle to find their competitive edge. High costs, regulatory burdens and a need to differentiate their digital offering will drive this segment of the market to pursue M&A over the coming year. This could lead to a renewed focus on challenger banks—well known for their niche technology offerings—as deal targets. 

Positive economic growth and decreasing interest rates are also driving factors, with UK banks offering relatively attractive valuations and stable returns on investment.

Regulation threatens to stifle deals

As a heavily regulated sector, merger control authorities are likely to be taking a closer look at deals within the UK financial services industry.

UK dealmakers face a proliferation of regulation relating to both merger control and foreign investment. Increased confidence among regulators to challenge deals, as well as a growing appetite to enforce procedural compliance, could potentially complicate and, in some cases, ultimately derail transactions.

The UK competition watchdog, the Competition & Markets Authority (CMA), is scrutinizing deals in greater detail, with increasingly unpredictable timings, and has not been afraid to take a different view to other authorities. In a signal of its more interventionist approach, the regulatory body sent 14 cases for a more in-depth “Phase 2” review stage between April 2022 and April 2023—a 40 percent increase.

Evolving regulatory requirements will put increasing pressure on advisors and lawyers as they look to complete large-cap deals. Although most UK-based financial services deals are likely to complete, dealmakers cannot afford to be complacent. The past year saw issues with several big-name deals across sectors, including Microsoft’s proposed takeover of Activision Blizzard, which the CMA blocked due to competition concerns, and only later approved after certain revisions and concessions were made.

Outlook for financial services M&A

While deals will continue to be announced, increased regulatory scrutiny—which is set to ramp up even further in the next 12 months—will require extra effort and pre-planning for successful completion. This will be particularly crucial for large-cap deals.

But savvy, determined dealmakers will adapt to the evolving regulatory landscape. The UK banking sector, in particular, looks set for a period of healthy M&A activity as players take advantage of improving economic conditions and a period of relative calm before July’s general election. Nationwide’s landmark purchase of Virgin Money looks set to trigger a wave of consolidation within retail banking, as industry peers race to increase their slice of the high street and beyond.

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