UK financial services leaders fear 40 percent revenue loss due to FinTech disruption

BY Fraser Tennant

Sixty-one percent of UK financial services industry leaders fear losing as much as 40 percent of their revenue to standalone FinTech firms, according to a new PwC report.

The report, ‘Redrawing the lines: FinTech’s growing influence on Financial Services’, highlights the views of the leaders of large, small and medium sized financial services companies in the UK, noting that, in comparison to the 61 percent of UK respondents that expressed fears over a substantial revenue loss, 51 percent of global financial services leaders believe their revenue is at risk.

However, the PwC survey also found that almost half of UK firms (47 percent) say they plan FinTech acquisitions over the next three to five years. Eighty-one percent indicated that they plan to initiate strategic partnerships with FinTechs over the same period.

“The financial services industry has embraced FinTech to help drive change and innovation,” said Steve Davies, EMEA FinTech leader at PwC. “FinTech collaboration, and innovation more widely, is not about jumping on the latest bandwagon – it is about finding the best, most efficient way to deliver your business strategy and ultimately better serve your customers.

“The UK’s financial sector seems to have a more realistic understanding of the long-term returns on targeted investments. Managing expectations around returns is important, particularly for firms facing significant cost pressures. Activity in the UK ranges from partnering with FinTechs startups, financing in-house incubators, and deploying new solutions, to testing use cases in areas like blockchain. There is a tension between the time needed for new ideas to mature and the expectations of firms seeking to collaborate with FinTech startups.” 

The survey also found that UK financial services firms currently dedicate 9 percent of their annual turnover to FinTech and IT projects – a total well below the global average of 15 percent. That said, UK firms are more realistic in their expectations of return on investment (ROI) with FinTech, with respondents saying they expect an annual ROI of 13 percent, while firms in the rest of the world expect an average ROI of 20 percent.

Mr Davies concluded: “Embracing FinTech is as much about different ways of working and problem solving as it is about deploying new technology. A sustained focus on innovation is much needed and can only be a good thing for customers, and the firms themselves.”

Report: Redrawing the lines: FinTech’s growing influence on Financial Services

Global dealmaking remains “resilient”, says new Q1 report

BY James Williams

Global dealmaking remains “resilient” in the face of an uncertain year, according to Mergermarket’s new ‘Global and regional M&A: Q1 2017’ report, which reveals a year-on-year increase in deal value of 8.9 percent.

The report, which confirms that global business making remains buoyant despite the prospect of an uncertain 12 months, shows that consumer mega-deals reached a record value during Q1, with 395 deals worth $136.1bn agreed.

“The consumer sector stole the limelight in Q1, with a record three deals over $10bn,” said Katharine Dennys, research editor at Mergermarket. “Deals such as BAT/Reynolds, Luxottica Group/Essilor International and Mead Johnson/Reckitt Benckinser caused Q1 value to account for almost two-thirds of total 2016 consumer activity.”

The report also states that, due to stricter regulations being imposed on transactions, Chinese dealmakers had a ‘reversal of fortunes’ in terms of their outbound investment, with the 96 deals worth $82bn in Q1 2016 reduced to 75 deals worth $11.8bn, an 85.6 percent drop in value. “Coupled with increased protectionism from the US and UK, this may signal the end of China’s outbound acquisition spree, at least in the short-term”, suggests Ms Dennys.

Due to the UK’s exit from the European Union, political uncertainty appears to have discouraged international dealmakers from pursuing transactions in the region. Despite this, US dealmakers had a strong quarter investing in the continent, with 150 deals worth $55.7bn – a 16 percent uptick in value compared to Q1 2016 (176 deals worth $48bn) and the strongest Q1 deal value posting since 2008 (138 deals worth $112.6bn).

Uncertainty throughout Europe has also seen inbound investments take a hit, with the report noting that value was reduced to 55.7 percent in comparison to Q4 2016. Furthermore, against a backdrop of Brexit negotiations and upcoming elections in France and Germany, Q1 saw 262 deals worth $71.7bn – the slowest by value since 2014 (291 deals worth $55.8bn).

Ms Dennys concluded: “There is evidence to suggest that dealmakers are seeing deals as more precious, with larger sums being invested in fewer deals. This is reflected in the average size of disclosed value deals reaching its highest Q1 level on Mergermarket record.” 

Report: Global and regional M&A: Q1 2017

Outlook for global IPOs appears strong

BY Richard Summerfield

The global IPO market has belied the uncertainty surrounding the global economy, registering the most impressive Q1 in a decade, according to a new report from EY – 'Global IPO Trends: Q1 2017'.

EY’s report reveals that it was the most active first quarter by number of IPOs globally since 2007, with 399 IPOs raising $47.5bn. In terms of year-over-year growth, there was a 92 percent increase  in number over 2016, and a 146 percent increase in total value.

The technology sector was the biggest sectoral winner. The industry contributed $6.5bn despite not having the highest number of IPOs. The tech space saw 45 offerings compared to 66 in the industrial sector, which registered proceeds in excess of $4.1bn. By contrast, the telecommunications space was the least active sector, with only six IPOs raising just $351m.

In the US market, 24 IPOs raised $10.8bn, the region’s best performance since Q2 2015, when 72 IPOs raised $14.3bn. The region suffered in comparison to the Asia-Pacific area, which was led by Greater China. In total, Asia-Pacific generated 70 percent of the total number of IPOs, for $16.2bn. However, the US’ performance was still strong. "The first quarter of 2017 was one of the strongest for the US IPO market and established a solid runway for more deals for the remainder of the year”, said Jackie Kelley, EY Americas IPO Markets Leader. “This positive performance should attract more tech and unicorns to the public markets and further open the door for other sectors such as retail, energy, and real estate. With the market currently insulated from the political uncertainty, more companies are expected to enter the filing process."

Dr Martin Steinbach, EY Global and EY EMEIA IPO Leader, said: “This is a promising start to global IPO activity this year. In the face of sustained global economic uncertainty, the first quarter of this year has set the stage for accelerated growth in 2017. Economic fundamentals are improving in the major developed economies. Equity index performance and valuations are trending upward, with several major indices reaching all-time highs. Concurrently, volatility is low, underpinning positive IPO sentiment, which is also supported by the successful US listing of a large technology unicorn."

Report: Global IPO Trends: Q1 2017

$13.3bn “transformational event” sees ConocoPhillips asset sale to Cenovus

BY Fraser Tennant

In what has been described as a “truly transformational event”, Canadian oil company Cenovus Energy Inc. has agreed to the £13.3bn acquisition of the 50 percent interest held by multinational energy corporation ConocoPhillips in the Foster Creek Christina Lake (FCCL) Partnership – the companies’ jointly owned oil sands venture operated by Cenovus.

Once complete, the transaction, which also includes the majority of ConocoPhillips’s western Canada Deep Basin gas assets, will immediately make Cenovus Canada’s largest thermal oil sands producer and one of the country’s largest oil and gas producers.

“This is a significant, win-win opportunity for ConocoPhillips and Cenovus,” said ConocoPhillips chairman and chief executive Ryan Lance. “ConocoPhillips Canada will now focus exclusively on our Surmont oil sands and the liquids-rich Blueberry-Montney unconventional asset. Cenovus will assume sole ownership of FCCL and assume operations in the Deep Basin assets. This is truly a transformational event for both companies.”

With operations and activities in 17 countries, $90bn of total assets and approximately 13,300 employees, ConocoPhillips is the world's largest independent exploration and production company based on production and proved reserves. The transaction is expected to make an immediate and significant impact on ConocoPhillip’s value proposition by allowing it to rapidly reduce debt to $20bn and double share repurchase authorisation to $6bn.

“This means we will not only accelerate, but exceed, the three-year plan we laid out in November 2016,” continued Mr Lance. “The transaction is accretive to our cash margins and lowers the average cost of supply of our portfolio, with no impact to our estimate of cash provided by operating activities at $50 per barrel Brent price. We will retain upside to future oil price increases through our equity stake in Cenovus and an uncapped, five-year contingent payment.”

With a continued focus on total shareholder return, Cenovus intends to consider the optimal level of its dividend once the company’s divestiture of non-core assets is substantially complete – taking into account future production growth, realised cost reductions and sustained margin improvements.

“This transformational acquisition allows us to take full control of our best-in-class oil sands projects and to add a second growth platform across the prolific Deep Basin that provides complementary short-cycle development opportunities,” said Brian Ferguson, president and chief executive of Cenovus. “The purchase of these assets is consistent with Cenovus’s existing strategy and core and I am confident this transaction will create substantial shareholder value for years to come.”

News: ConocoPhillips sells oil and gas assets to Cenovus for $13.3 billion

Optimism returns: UK asset and wealth arena improves in Q1 2017

BY Fraser Tennant

Optimism returned to the UK asset and wealth arena in Q1 2017 following a period of intense pessimism throughout 2016, according to the latest CBI/PwC Financial Services Survey published this week.

The survey, a quarterly snapshot of the views of 98 UK firms, found that business volumes grew in the three months to March, although this growth is expected to slow over Q2. However, despite the expected slowdown, spreads and average fees and commissions are expected to rise, with profitability continuing to improve strongly.

Among the survey’s key findings were: (i) optimism in the financial services sector was broadly stable, following four consecutive quarters of declining sentiment (the longest period of falling sentiment since the global financial crisis of 2008); (ii) 33 percent of firms said they were more optimistic about the overall business situation compared with three months ago, while 29 percent were less optimistic; (iii) 34 percent of firms said that business volumes were up, while 17 percent said they were down; and (iv) looking ahead to Q2, growth in business volumes is expected to slow somewhat, with 23 percent of firms expecting volumes to rise next quarter, while 14 percent expect them to fall.

In terms of the overall business situation, optimism varied across sectors, with building societies, life insurers, insurance brokers and investment managers feeling more optimistic and finance houses and general insurers less so. In the banking sector sentiment was unchanged.

“The industry has picked itself up and feels in a stronger position than it did six months ago,” said Mark Pugh, UK asset and wealth management leader at PwC. “Nonetheless, the sector remains sensitive to uncertainty and potential market volatility.” Among the uncertainties are rising costs, technology spend and regulatory hurdles, with regulation and legislation also cited as constraints on business expansion for asset and wealth managers over the next 12 months.

Mr Pugh continued: “A slight reduction in the pace of technology spend could represent asset and wealth managers delaying large scale investment until they have more certainty on upcoming regulation such as MiFID II, PRIIPS and the FCA Market Study.”

Despite the potential delay in investment,  the ability to implement innovation quickly is driving consolidation in the sector – a trend which is expected to continue. “Anticipation of future consolidation seems to be a factor in the industry’s swing back towards optimism,” concluded Mr Pugh.

News: Optimism stabilises as financial services gets boost from solid economy – CBI/PwC