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Private banking sector still appears intent on consolidation, says KPMG survey

Saudi Arabia: Saturday, June 27 - 2009 @ 11:09

However, this appetite for acquisition belies some serious structural concerns that should be dealt with prior to many banks returning to the acquisition trail.

Perhaps most notably, the sector is facing a tremendous squeeze on its margins, driven by falling asset values and yields, and a high cost base. Many banks will find it hard to substantially improve their profit margins in the short-term.

This, combined with some prospective acquirers adopting a ‘wait and see’ policy and potential sellers being reluctant to accept current low valuations, may delay any surge in M&A activity.

Perhaps unsurprisingly then, the survey, entitled ‘Hungry for More’ and undertaken by professional services organization, KPMG, shows that, at least for the immediate future, organic growth remains a priority.

Previous editions of the survey revealed that, in 2006, 84% of respondents expected further consolidation within the next three years. By 2007, that number had slipped slightly to 81%. Two years later and the prospect of consolidation is still backed by a healthy 72% while a similar number also claim they believe acquisitions to be worthwhile in the current climate.

As expected though, optimism for the sector’s growth prospects has been distinctly dented. Over 90% of respondents were bullish about growth prospects in 2006 and 2007 but that number has dwindled to 53% in the current survey. Despite this, only 14% believe growth prospects to be poor, with the rest remaining indifferent.

Commenting on the survey findings, KPMG in Saudi Arabia’s Senior Partner, Abdullah bin Hamad Al Fozan, 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 around growth prospects has declined – but not terminally so. The desire to drive consolidation through the industry remains. All that appears to be lacking is the means and opportunity to do so. In the meantime, the sensible alternative is to focus on organic growth. There is little of the widespread pessimism which has blighted other arms of the banking industry.”

“Several factors may reignite the M&A flame within private banking; 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 tax reporting standards. However, one key consideration should be the noticeable scarcity of potential acquisition targets. This is most evident from our research in the Asia-Pacific region, an area where so many banks want to tap into the burgeoning number of wealthy individuals,” he added.

In the meantime, the report points out that organic growth is very much the order of the day. Thirty-six percent of respondents believe that all of their growth over the next two years will be generated organically. A further 36% believe that organic growth will account for three-quarters of their growth, with the rest driven by acquisitions. The response rates are higher still amongst smaller banks, demonstrating that they are more than happy to focus on organic growth with no need for an acquisitive strategy.

Even organic growth is far from assured though. As Al Fozan points out, resources are scarce and margins are under intense pressure. Cost control is therefore high on the agenda of many Boards and it is likely to be some time before adequate steps can be taken to get profits back on track.

This may explain why respondents believe that most acquisitions which are secured will be made in the bargain basement as opposed to at the top of the market. When asked how much they might feasibly expect to spend on M&A in the next two years, 44% plumped for less than $250m, while a further 27% foresaw no investment whatsoever. This is a dramatic reduction on two years ago, when the responses were 27 and 7% respectively.

Interestingly, those deals which have been secured over the past two years have tended to be close to home. Of the 56 deals closed by the survey respondents in that time, 54% were domestic deals while only 23% involved the purchase of a business in another region.

Where any investments might be directed remains a key question facing the industry. Accepted industry rhetoric in recent years has pointed towards Asia-Pacific. However, when asked whether acquisitions were worthwhile in the current environment, only 62% of Asia-Pacific respondents agreed (compared to 74% globally). Perhaps most tellingly though, only eight percent of Asia-Pacific respondents voiced a definite ‘yes’.

Challenges can remain even for those banks successfully agreeing a purchase. Aligning business models and harmonizing business processes were cited among the primary post-acquisition difficulties. There is also the risk of clients switching allegiance – the survey shows that around 6% (higher in Asia-Pacific at 9%) of an acquired bank’s client base was lost within twelve months of the deal taking place.

Al Fozan, continued:

“Undeniably, plenty of issues remain which are hindering progress in the M&A space. However, if this logjam of issues can be resolved – and when you take into consideration the growing pressure that some beleaguered banks are coming under to shed supposedly non-core activities – then I honestly do think the time is finally right for the long-awaited consolidation in private banking.”

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Saturday, June 27- 2009 @ 11:09 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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