Time ripe for M&A in financial services

With India recovering from a slight pause, to continue steadily on to becoming an $8-plus trillion economy by the end of the decade, we took some time to reflect on the themes that may lie ahead. From distress-driven shotgun marriages to the adrenalin-pumped world of fintech, we expect a strong mergers and acquisitions (M&A) market for financial services.  

The year 2020 has been an unpredictable year, to say the least — and for very different reasons from the rest of us. It was also so for the shareholders of Yes Bank and Lakshmi Vilas Bank, as they were taken aback with the decisive action taken by the Reserve Bank of India (RBI). For a variety of reasons, neither was able to act in time to create a private solution — either because of unforgiving investors, or due to the allure of getting a better deal. Whatever the reason, the regulator has clearly reiterated the alacrity with which they can move, when needed.  

In other non-banking situations, it’s the lenders that have been put into the driver’s seat. While they have been slower, they have set out on the path to achieving a resolution as well, with all eyes on the outcome of the two large lender-driven processes underway.  

The decisive view from an external environment has clearly shaken up attitudes from the erstwhile era, where promoters felt complacent that eventually they would find a solution. This, coupled with the strained balance sheets that may surface after the lifting of the moratorium, is likely to hasten consolidation in the sector. Those that are willing to cut their losses swiftly, will find the larger well-capitalised companies as well as the emerging banking franchises ready to use the opportunity to enhance their product and geographic presence, and build stronger financial institutions. 

The other driver for M&A in banking could be the implementation of parts — or all — of the RBI’s Internal Working Group’s recommendations. These may range from divestment of non-banking subsidiaries for some, to conversion to financial holding companies for others, heralding the advent of new financial conglomerates. Large non-banking financial companies and business conglomerates may also emerge as potential consolidators, depending on the extent of the recommendations finally accepted by the RBI. 

One particularly interesting segment that will see significant activity will be fintech. The financial sector had already set out on a strong path of digitisation over the last few years. The pandemic has only hastened the adoption of digital payments. The speed and scale of this transformation is likely to increase the need for closer cooperation between traditional financial institutions and the technology-first models. On the domestic M&A front, this is likely to see consolidation of complementary product segments and equity relationships between the incumbents with fintech.  

Cross-border M&A, which has been relatively quiet in recent times, is also likely to witness heightened activity on the back of fintech. Indian fintech majors have demonstrated the ability to take their low-cost/high-volume models to global shores. With the National Payments Corporation of India having being invited by international regulators to help build the digital rails in their markets, Indian fintechs will be even more sought after. There have already been early signs of interest from global fintech majors, and we expect this to result in active M&A activity in the coming years. 

Financial services have been a mainstay for the broader M&A markets across cycles in India. We remain confident that there is only going to be deeper activity with enough room for a wide range of market participants — from distress-focused, deep value-seeking conglomerates and distress funds, to fast-paced, growth-focused fintech majors.

The writers are Group CEO, and Managing Director & Head, Corporate Finance, at Ambit, respectively