Mergers and acquisition activity will be
slow for the next two years according to a new report byKPMG on global banking,
called Bruised but not broken, which predicts that activity will continue to be predominantly locally focused.

The report foresees no big-ticket M&A
activity for at least two years; it will be stifled by regulation and be driven
by portfolio alignment, mid-tier players and domestic deals, the firm predicts.

Analysis of global banking M&A activity
over the period 2005 to 2010 shows that local deals accounted for 73 per cent
of all banking transactions, with 19 per cent being within region and only 8
per cent being inter-continental deals, said the firm. In addition, the average
size of a banking deal has steadily declined since immediately before the
downturn, with annual value falling 64 per cent over three years from a high in
2007 of $243 million to $87 million in 2010.

“At the moment M&A appears to be used
mainly by banks buying on their geographic doorstep. Activity over the next few
years is likely to be dominated by second-tier consolidation in countries such
as China, the US, Germany and Spain, giving rise to mainly home market
transactions. In the West, regulation will continue to choke large banks’
ability to pursue big-ticket M&A, but will encourage some asset disposals
as banks seek to focus and adapt their operating models,” said Stuart
Robertson, global transactions and restructuring banking sector lead at KPMG.

“When conditions are right for larger
transactions to return, banks around the world could be ready to flex their
financial muscles. Australian, Canadian and some capital-strong European banks
will be in a position to implement larger-scale M&A plans. The
international ambitions of BRIC banks may also have evolved further by then,”
he added.

“China is regarded as having the highest
growth potential for banking over the next decade, however strong concerns
exist around the difficulties for non-Chinese banks to penetrate the market and
to build scale. India is the clear second-favorite, though concerns also
linger over the ability of foreign banks to achieve scale in the country,” said
David Sayer, global head of retail banking at KPMG.

“Overall, banks not serving markets in Asia, Africa or Latin
America look set to be slower growers. While a lot of attention has been
focused on China and India, which top the growth agenda for many banks, to
ignore Africa would be a major oversight. It is an area that may offer great
potential opportunities for those who get in early and with the right growth
strategy.”

The report is based on findings from 23
interviews with senior banking executives globally.