Malta: Increased Deal Activity For Maltese Banks

Last Updated: 29 December 2016
Article by David Pace

Malta has witnessed increased deal activity in the banking sector over the past years. We ask why and where the trend is set to go.

What is driving the deal flow?

Radical changes in the economic and regulatory environment are leading to a rethinking of banks' business models.

Wafer thin margins and higher compliance costs motivate consolidation within the sector. At the same time a number of established European banking groups came under fire as they sought state assistance to allay financial troubles. Against this backdrop we continue to witness the shedding of non-core assets and a wave of geographic re-trenchment, also impacting certain local subsidiaries of international banking groups.

The reputation of the Maltese jurisdiction coupled with the Regulator's firm yet approachable disposition continues to sustain interest in new local banking operations with a preference, at times, for the acquisition of an ongoing operation as a mode of entry. Reasons underpinning the latter's preference included knowledgeable financial services personnel and their trusted relationships with key stake-holders in the industry, operational processes and procedures already in place that are compliant with local requirements, together with specific financial assets that may be of value to the acquiring entities.

Meanwhile developments in technology and the digital era continue to drive niche banking offerings. Promoters of such banking models are keen to meet the required robust standards while keeping operating structures lean and cost effective – and Malta fits the bill in this regard.

The Maltese jurisdiction is also seen in a favourable light by large industrial/trading groups interested in a banking division to service the needs of group members, as well as customers and suppliers.

Pricing of banking deals

The limited number of local transactions does not allow for meaningful transaction insights, as prices reflect transaction specificities. On a more general level, prices are however reflective of global Price to Book (PB) multiples that are still below pre-crisis levels and currently averaging at a marginal premium above book. Also mirroring developments at a European level, are below book pricing scenarios arising as vendors are tasked to exit investments in non-core banking units with limited time-frames and resources to groom for sale.

The future?

At a European level, M&A activity in the banking space is predicted to continue in bear mode as the major banks continue to restructure and digest new regulation. The ECB's AQR is expected to give rise to an additional round of non-core and regulatory driven sales. This could impact local banking M&A by presenting target opportunities. On the buy side the increasing appeal of consolidation of second tier domestic (core) players could also spur interest in transactions.

Sharing insights from our experience in banking M&A transactions

From a sell-side perspective, it is critical to dedicate sufficient resources and time to prepare the asset for the market. This will typically entail juxtaposing the key areas of value of the bank with knowledge of what is being sought for in the buyers' market, allowing the seller to groom the bank in a way that increases its appeal to the buyer audience. This process will typically be supported by the preparation of high-level key information at an early stage in the process, coupled with the implementation of actions to optimise the bank's target structure, such as asset carve-outs or reduction of capital.

Looking at a transaction from a buy-side point of view, a key factor is the extent to which the acquirer can be specific on its strategic rationale for the acquisition, reflecting it in a clear and robust view of the target's synergistic potential. Validating the deal rationale through a focussed due diligence is also an important element of a successful acquisition. Finally all this needs to be mirrored in the business plan to be presented to the Regulator when seeking its approval for the transfer of ownership.

Keeping an open and proactive communication line with the Regulator is highly recommended as a key contributor to a smoother and timelier transaction execution, whether buying or selling a bank.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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David Pace
 
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