A new wave of restructuring is expected in the financial services sector worldwide over the next five years, according to a new briefing paper by the Financial Services Group of PricewaterhouseCoopers and the Economist Intelligence Unit. However, it is clear that the context of restructuring will be very different from the blockbuster transactions of the 1990s – increasing regulation and intense competition has changed the industry landscape, economic recovery remains fragile and institutions are more wary than ever of reputational and other forms of risk.

Senior executives from 123 financial services institutions worldwide took part in an online survey during September and October 2003. Almost four out of five respondents expected their firms to be restructured significantly within the next five years and 92 percent of survey participants believed that restructuring will be "important, very important or integral" to helping complete their strategies.

According to Nigel Vooght, a partner with PricewaterhouseCoopers, "There will be a great deal of restructuring in the financial services industry, but much of it will be designed to sharpen focus, improve efficiency and take incremental steps forward. As institutions attune their capital management to the risks they face and strive to be better stewards of their shareholders' capital, firms will reassess their positions in certain markets. In this environment, communication will be central to success."

The briefing paper also revealed that many institutions will no longer seek to be in every segment and territory in which they operate but will look to expand regionally instead of globally or focus on particular financial products and services.

The tenor of the next five years will be set by the regulators as much as by institutions themselves, the paper found. Almost a third of the survey respondents pointed to restrictions imposed on them by regulators, such as tougher rules on compliance, capital needs and competition, as being a key external driver of restructuring. Some 64 percent and 53 percent of respondents respectively said regulatory capital and reporting requirements respectively were the two issues most likely to have an impact on their firms' strategy for restructuring.

Asked whether the increasing compliance burden and capital requirements for financial institutions will encourage them to exit existing businesses rather than enter new ones, survey respondents were strikingly divided - 51 percent agreed and 49 percent disagreed. Respondents in Western Europe appeared to feel the weight of regulation more heavily than other regions: 62 percent of them agreed they would be likelier to exit businesses than seek out new ventures as a result of compliance requirements.

As part of the briefing PricewaterhouseCoopers identified five key drivers for success:

  • Define a clear strategy. Only by defining such a strategy is it easy to identify genuine opportunities and to exit, through sale or outsourcing, marginal activities. Successful restructuring requires senior management to know which areas of the business are truly core to achieving their goals.
  • Effective communication, both inside and outside the company. Articulating the strategy behind restructuring will become ever more critical and winning the stock market's support will also be vital for a company to be credible in the eyes of the market. Communication skills are likely to become as important as deal-making ability.
  • Manage regulatory risk. Regulatory activity will be a key factor over the coming years in determining everything from levels of capital to reporting processes. Winners will understand the current and future regulatory environment and will embed a culture of compliance throughout their organization. They will also have close relationships with the regulators, enhancing their ability to push through specific deals.
  • Differentiation. In markets where institutions require scale but where suitable acquisition opportunities are scarce, or where they lack scale and consolidation is likely, differentiation is the key to winning the right target or getting the right price.
  • Innovate. Joint ventures and creative outsourcing with long term partners bring risks of their own but can be more effective than mergers, acquisitions and disposals in reaching certain goals – they need to be part of an armory of restructuring strategies.

Mark Speller, a partner with PricewaterhouseCoopers, said, "The survey revealed that deal-making will still be driven by the need to restructure inefficient operations as well as responding to competitive pressures and demanding customers. The result of these traditional drivers will, however, not just be old-fashioned takeovers and disposals, but will also embrace alliances, joint ventures and partnering, for example, outsourcing. Institutions will look to execute their strategies incrementally, undertaking deals that fit into a coherent strategy."

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