KPMG: Banking sector still seems intent on consolidation

 

The appetite for acquisition belies some serious structural concerns that should be dealt with before too many banks return to the acquisition trail, says KPMG in a survey

THE global credit crisis appears to have done little to dampen expectations of pending international consolidation across the private banking and wealth management industry, according to a survey by KPMG International.

However, this appetite for acquisition belies some serious structural concerns that should be dealt with before too many banks return to the acquisition trail, KPMG said in the survey, entitled "Hungry for More".

Perhaps more notably, the sector is facing a tremendous squeeze on its margin, driven by falling asset values and yields as well as a high cost base, it added in a statement yesterday on the survey.

The survey indicated that many banks would find it hard to substantially improve their profit margins in the short term.

This combined with some prospective acquirers' wait-and-see" policy and the reluctance of potential sellers to accept current low valuations could delay any resurgence of merger and acquisition activities, said KPMG.

Not surprisingly, the survey indicated that, at least for the immediate future, organic growth remained a priority.

Commenting on the findings, KPMG Advisory's Stuart Robertson, a partner in KPMG's Swiss firm, said: "The findings reinforce what I am seeing in the market, in that the private banking sector has not been as badly affected by the ravages of the credit crisis as may have been feared.

"For sure, optimism of growth prospects has declined, but not terminally so."

He added that there was still the desire to drive consolidation through the industry.

"Several factors may reignite the merger and acquisition flame within private banking, including clients showing greater risk appetite, a return to greater profitability, and clarity around the future of onshore/offshore banking in view of the agreement by a number of countries to adopt the OECD's (Organisation for Economic Cooperation and Development) tax reporting standards," Robertson said.

However, one key consolidation should be the noticeable scarcity of potential acquisition targets, he said.

The response rate was higher still among smaller banks, demonstrating that they were more than happy to focus on organic growth instead of an acquisitive strategy, Robertson added.

However, even organic growth was far from assured, he said, with resources scarce and margins under intense pressure.

Cost control thus ranked high on the agenda of many boards and it would likely be some time before adequate steps could be taken to get profits back on track.

Challenges could remain even for those banks which managed to agree to a purchase, Robertson said.

Aligning business models and harmonising business processes were cited among the main post-acquisition difficulties.

"Undeniably, plenty of issues remain which are hindering progress in the merger and acquisition space. However, if this logjam of issues can be resolved, then the time is finally right for the long-awaited consolidation in private banking," he said. - Bernama