Shield sector focus: Financial Services

The Financial Services sector includes the worlds of commercial and investment banking, asset management, insurance and all related services.

Shield Corporate Finance has been involved in a number of deals in the Financial Services sector. Most recently we advised on the MBO of specialist mortgage broker, Regency Mortgage Corporation and carried out valuation work on behalf of a company offering insurance broking and risk management services.

Shield professionals bring extensive Financial Services experience from many other transactions in the sector, including the sale of a commercial bank in the US and the spin-out of the European derivatives processing arm of a major international investment bank.

Financial Service sector M&A comment

Transaction activity in the Financial Services sector was higher than in any other sector in 2006 (22% of all deals by value and 11% by volume). This was driven by high value mergers such as Bank of New York's acquisition of Mellon Corp and MBNA and UniCredito's acquisition of Bank Austria Creditanstalt.

The trend for mergers in the banking industry, especially European cross-border deals, is likely to remain strong, with Barclays and RBS's €66bn tussle over ABN- Amro being a prime example.

In the UK, we have noted the growing trend towards consolidation in the insurance broking sector. This has been driven mainly by increased and costly regulation which has come into force since the FSA started to regulate brokers, plus the fact that the market is highly fragmented. This has resulted in a number of consolidators such as Towergate, Oval and Smart & Cooke looking to build scale by acquiring smaller brokers.

As with many industries, outsourcing (particularly to India) has increased greatly as banks and financial institutions look to cut costs. However, a recent trend has seen a number of companies such as Norwich Union, Abbey, Lloyds TSB, Newcastle Building Society and esure move their call-centre operations back to the UK in the face of customer dissatisfaction and even accusations of fraud.

In the US, the spectre of a possible housing crash still looms. As interest rates have moved from the historic low of 1% in 2004 to the current 5.25%, thousands of sub-prime borrowers have encountered serious financial difficulties. Whereas HSBC, which recently issued its first ever profit warning due to the performance of its recent acquisition, Household International, can weather the storm, over 25 sub-prime lenders have ceased trading in recent months, most notably New Century Financial, which originated over $60bn in mortgages in 2007. However, we feel that it is unlikely that this pattern will be repeated in the UK, mainly due to the stricter lending criteria applied by UK lenders.

One of the most marked trends in recent years has been the phenomenal growth in hedge funds, with over 9,000 funds in existence, managing around $1.5 trillion of funds. This sector is likely to remain strong, despite generally lower returns of late and a number of well publicised failures, with the opening up of the sector to retail investors in the UK likely to fuel demand.