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.