M&A Outlook: Australian Financial Services Towards 2030 minterellison.com Introduction Welcome to the second edition of the MinterEllison M&A outlook series. The financial services sector is one of Additional drivers are bringing We have asked Australia’s most dynamic and innovative transformational change to the financial members of our industries, and continues to undergo services sector. These drivers include transformational change. Set against changes to prudential standards, shifting cross-disciplinary the backdrop of uncertain economic customer expectations, increased team to share conditions and the wide-ranging, stakeholder management, technological their key insights continuing ramifications of the Financial advancements and new competitive and on the future Services Royal Commission (FSRC), commercial threats. direction of the significant changes in the financial services Victoria Allen industry will continue over the short to However, many of these drivers are moving industry. We would medium term as it addresses a myriad of the sector in different directions and there welcome the Partner issues. These include a need to restructure, will be important trade-offs to be made by opportunity address shortcomings in culture and market participants over time. This report [email protected] explores how M&A may be one of the key to discuss its respond to competition from traditional content with you and non-traditional players. responses to some of these underlying drivers in the next few years. We explore in more detail. M&A activity will be one mechanism open how financial services companies might to institutions in the sector to address the best position themselves for the longer- collective impact of these issues on the term challenges that lie ahead. organisation, its business and its reputation. The recommendations of the FSRC are a catalyst for simplification, long term change and an opportunity to re- establish community trust. The Federal Budget provided more funding to ASIC and APRA to increase their enforcement activities, and for an increased role for Rahoul Chowdry regulators across the spectrum of financial Partner, Financial Services services businesses. Industry Lead [email protected] 2 M&A Outlook: Australian Financial Services Towards 2030 Contents Industry Climate: Financial Services at the cross roads 4 Part D Technology 46 Summary of key drivers of M&A 5 Technology as a competitor in financial services 47 Technology as an enabler, with a focus on the customer 52 Part A Short term M&A context and outlook 6 A key enabler in the drive to acquire and retain customers 54 Short term M&A context and outlook 7 Reducing customer friction 55 Recent M&A developments in financial services 11 Personalised offerings using artificial intelligence Short term predictions 12 and machine learning 56 Divestment of wealth management 17 24/7 capabilities and availability through multichannel delivery and digital payments 58 Recent international trends 18 Financial reporting 63 Regulatory reporting aided by regtech 64 Part B Long term drivers 21 International drivers in technology 65 Long term drivers 22 Coding error and Australia’s largest ever civil penalty 66 Economic and commercial issues 24 Are branch networks now legacy systems? 67 Funds management and investment platforms 32 Part E Conclusions and Key Contacts 68 Part C Governance & culture, and regulatory issues 33 Towards 2030 – M&A will be an important Governance & culture, and regulatory issues 34 mechanism for boards and management 67 The FSRC implementation roadmap 37 The BEAR case on potential talent gaps 40 About Us 71 Regulation and compliance costs 41 Marching towards Basel IV 42 Further regulatory changes likely in superannuation 43 Australian regulatory structure and its impact on M&A 44 DISCLAIMER: (All financial data and figures including share price information is represented as at 31 July 2019 unless specifically noted). MinterEllison does not represent or warrant that any information provided to you in this document is accurate or complete, or that reasonable care has been taken in the preparation of this document. All information has been taken from publicly available sources. You must make and rely upon your own evaluation of the information in this document. Except as, to the extent, required by law, MinterEllison will not be liable for any direct or indirect loss or damage arising in any way out of the use by you of the information in this document. This document is supplied to you on the condition that it and the contents are confidential and must be kept confidential and not disclosed to any third party. MinterEllison 3 Industry climate: Financial services at the crossroads The final report of the Financial Services Royal Commission will undoubtedly act as a catalyst for the start of a longer term transformation within the financial services sector. However, it also coincides with the emergence of several other factors that are likely to also drive significant change within the industry. Some of these relate to issues highlighted by the FSRC, including changes to governance, culture, remuneration, simplification and the need to establish trust. Other factors include an increased focus on the customer (assisted by the move to ‘open banking’), technological changes, and increased competitive and commercial threats. Competitive factors, regulatory costs and Significant regulatory change is upon us. In addition, market dynamics and This report considers the factors driving lack of scale will result in M&A being one of Change is occurring not only from new competitive threats are driving changes in change in the sector, as well as setting the tools that is increasingly considered for regulations, but also from the stronger the sector and providing other reasons for out our M&A outlook. While it is difficult addressing competitive pressures faced by enforcement of existing regulations. The reassessment by decision makers. Overall, to predict what the changes in the sector financial institutions. government’s FSRC recommendation the prospects for profitability and growth, will be in the coming 10 years, ‘business implementation roadmap, the introduction particularly for the larger financial services as usual’ will not look the same as it does While the short term impact from some of the Banking Executive Accountability players in Australia, look to be challenging. today. It will no doubt be a challenging of the changes discussed in this report Regime (BEAR), the impact of Open Data Economic and demographic changes environment for management and boards are more foreseeable than longer term legislation, Productivity Commission including lower inflation, interest rates and to delicately balance responses to the impacts, the long term impacts are likely to enquiries, changes to banking capital economic growth, high levels of household numerous competing issues facing the create the greatest need for M&A. requirements (both in Australia, and debt, growing life expectancy and sector. With many companies slow to Despite solid fundamentals, we anticipate perhaps more acutely, in New Zealand), increasing urban density are all combining recognise the fall in the long term cost of market conditions are shifting which and increasing enforcement by regulators, at the same time. Institutions are facing capital, it’s an opportune time for M&A, and are likely to create additional pressures are providing Australian financial services increasing competition from overseas there are many factors that will influence on financial services institutions. These institutions and investors with new providers and new, nimble and well-funded short term and long term decision making challenges may create triggers for regulatory and compliance challenges technology driven upstarts, which are in the future. institutions and competitors to undertake and questions for their business models. delivering powerful customer experiences strategic reviews. There will be increased onus on boards and and seeking to disrupt the status quo. management to assist in this transformation process in a timely fashion. 4 M&A Outlook: Australian Financial Services Towards 2030 Extent to which Issues Short term impact Long term impact Summary management can influence of key drivers Culture and governance n u u BEAR n u u of M&A Regulation and compliance costs u n n Basel IV n l l Further regulatory change in superannuation n n l Focuses on culture and International experience u n l governance, customers and Increased scrutiny from regulatory bodies n n l business models are among Governance and regulatory the key drivers of M&A which NZ regulatory capital changes l n l management can influence Bigtech l u l (as highlighted in Figure 1). Fintech u u n Neobanks n n n White labelling n u l International Players Growth l n l Competition Open banking l u n Consolidation n n n Legacy IT/ageing infrastructure u n n Branch networks optimisation n n n Customer focus l u u Technology Digital banking l u n Artificial intelligence/robo advice l u l Figure 1 – Key drivers of M&A, impacts High household debt l n l and extent to which management Lower credit growth can influence them. n u l Subdued yields n u l l Low n Medium u High Overseas funding n n l Source: MinterEllison Economic Weaker asset growth n u l Focused business models l n u MinterEllison 5 Part A Short term M&A context and outlook 6 M&A Outlook: Australian Financial Services Towards 2030 Short term M&A context and outlook The market value of banks stocks has recovered by General Life Banking 8% over the year ending Insurance Insurance October 2019 as investor concerns regarding the The large Australian general insurers have Even before the FSRC commenced, the CBA’s divestment of its 20% stake in FSRC abated. This has been seeking to streamline their businesses, Australian life insurance segment had seen Vietnam International Commercial Joint occurred despite weaker simplify management structures and lift strong M&A activity driven by offshore Stock Bank is the only pure banking credit growth and falling profitability.