Financial services companies refocus their business portfolios to address emerging technologies and digital transformation. Read our 2018 divestment study to learn more.
Of the financial services companies surveyed, 87% are planning to divest within the next two years.
Charlie Alexander

Charlie Alexander

EY Global Banking and Capital Markets

Transactions Leader

+852 2629 3961

charlie.alexander@hk.ey.com

David Lambert

David Lambert

EY Global Insurance

Transactions Leader

+44 207 951 9848

dlambert@uk.ey.com

Nadine Mirchandani

Nadine Mirchandani

EY Global Wealth and Asset

Transactions Leader

+1 212 773 0090

nadine.mirchandani@ey.com

Financial Services Divestment Study

After a decade of coping with the fallout from the credit crisis, the financial services sector is emerging into a bold new future, even as it has barely had a chance to take a breath. The pace of technological change in the industry threatens to turn established business models on their heads — from digital disruption forcing businesses to build completely new sales channels; to digital banks built from scratch by players from outside the sector; to the advent of blockchain, which brings a revolution in so many sectors.

This financial services sector report, published alongside this year’s Global Corporate Divestment Study, highlights the ways organizations are exploiting the opportunities presented by technology to counter competitive threats. Divestment is a crucial part of this process: companies are realigning their business portfolios to cut costs, better reflect their emerging strategies and free up resources for investment in their new priorities.

The advent of sophisticated analytics capabilities is also giving the sector a means by which to secure better value from divestments.


Banking

Long-established businesses in both retail and investment banking are already being disintermediated by technology. Others are disrupting their own business models to survive and thrive. More than three-quarters of banking executives (83%) expect to initiate their next divestment within the next two years, amid speculation that dealmaking will reflect the macro shifts affecting the industry.

Insurance

Insurers in many markets are struggling with poor returns and unsustainably high operating costs on existing products, combined with the need to reposition their capital towards innovative growth opportunities.

Technological innovation offers insurance companies opportunities to achieve growth and obtain significant operating efficiencies. More than half (61%) expect the number of technology-driven divestments to increase over the next 12 months, ahead of their peers both in banking and in wealth and asset management.

Wealth and asset management

Wealth and asset managers are facing increasingly diverse demands from their client base. Over the past three years, the sector has overwhelmingly trended toward passive fund investment, which underlines the difficulty of aligning the price-value equation in the sector. Equally challenging is investor appetite for low-cost beta solutions, and high return alternative alpha pairings in portfolios.

In virtually all cases, wealth and asset managers recognize the imperative to act strategically and decisively: 24% say they have made between five and 10 divestments over the past three years, well ahead of their sector peers.

FinTech, blockchain, bitcoin, e-payment, robo-advisors, artificial intelligence, telematics — these have all become familiar terms in financial services, each posing both potential opportunity and threat to any sector that relies on legacy systems and traditional methods for customer engagement.

But instead of diving headfirst into the latest technology, the sector is focusing on the fundamentals. If structural reforms have taught the sector anything, it’s that reexamining the basics can bring significant benefits. For example, many are cutting costs through divestments of noncore middle- and back-office functions.

Consider joint ventures

The financial services company of the future is not primarily concerned with being the biggest, but having the best ecosystem. Collaborative partnerships, cited by 71% of firms, offer a range of back- and middle-office expertise.

Focus on carve-outs and third-party opportunities

For financial companies, the potential value of sorting out back-office functions — and the resulting equity story — can be game-changing.

  • More than two-thirds (69%) of financial services executives are considering carve-outs of back- and middle-office assets and using a managed service provider instead.
  • Two-thirds (67%) may transfer employees to a third party and contract them back as needed.

Both of these approaches offer cost savings without losing access to the expertise needed to maintain these support functions. But this doesn’t make them easy to execute.

New technologies offer cost efficiencies

While more likely to be introduced in larger global financial services businesses, innovations such as robotic process automation — whether built in-house or via a third party — are attracting strong interest: 42% of financial services respondents indicated that their companies are pursuing such technologies. These companies will need to determine whether such investments contribute more value than the potential savings of divestments that are driven by restructuring.

According to 87% of financial sector respondents, the weak competitive position of a business unit triggered their latest divestment. One-third (33%) made divestments to fund investments in new technology.

These two factors are related: technological shortcomings often affect competitiveness. However, divesting to fix a competitive technological shortfall may disappoint without a strategic rationale.

To reshape a portfolio and compete with disruptive technologies, financial services businesses require a more strategic approach to divestment — governed by disciplined reviews driven by strategic intent and shareholder return, rather than circumstance.

  • Apply analytics consistently: Financial services firms are confident in their use of analytics in portfolio decisions and intend to do more: 84% say they will use predictive analytics more in the future and 81% say the same of prescriptive analytics. Yet 58% still struggle to apply data-driven analytics consistently to divestment decisions. This reinforces the imperative to embed these tools in the divestment process, which can lead to more data-driven decisions.
  • Be a disciplined opportunist: Almost three-quarters (74%) say opportunity drove their most recent divestment. Businesses that do not drill down to find the true value of their assets — for example, with analytics tools that can highlight previously unidentified upsides — risk being short-changed. High-performing enterprises establish a value case for all businesses in a portfolio, even if a divestment is not currently on the agenda, to maximize value if an unexpected offer does materialize.
  • Engage the C-suite: Executive support is crucial, especially for the 66% of firms that struggle to make portfolio reviews a strategic imperative. Building a value story based on divestment and articulating that story clearly (i.e., through analytics), will bring the C-suite on board. Improving lines of communication between the board and the M&A team — currently an issue for 65% of the firms we surveyed — only strengthens the relationship.
  • Reassess the talent mix: Almost two-thirds of financial services firms (63%) find it challenging to identify the right team to drive portfolio reviews. For example, does your business have the skills in-house to assess the impact and value of evolving technologies? If not, you may need to bring in talent to fill this gap.

In summary, a regular, structured portfolio review process — designed to support corporate growth strategies, agreed-upon metrics and robust technical analysis — is the surest route to divestment value.

Financial services companies must learn from the analysis that was required for structural reform. What worked, what needs improvement and what could be simplified? Building on prior experience by exploiting technology, such as analytics, to identify core and noncore assets.

  • Redefine the core: Which assets will be central to a company’s commercial strategy in the future? Advanced analytics tools can extract detailed insights from the data generated during previous restructuring work, particularly when external data such as trends analysis is added. For example, prescriptive analytics can identify potential new profit centers or product mixes — elements that may have been missed simply because nobody was looking at the right data.
  • Execute more effectively: While 76% of executives say structural reform has helped them better understand business unit relationships and interdependencies, only 58% say that they have not leveraged structural reform efforts to help identify the key people, systems, assets and agreements to be addressed in a separation. Any restructuring work undertaken to prepare for divestment should help the organization to separate the portfolio at every level. This also helps address compliance concerns, given regulators’ expectation that, whether a company is buying or selling, they are not having a negative impact on either the organization or its customers.
  • Build the value case: Over three-quarters (79%) of firms say they now have a better understanding of the balance sheets considered for sale. This data is essential to building a stronger value story for potential buyers, harnessing financial modeling and scenario planning tools to make the best possible case.
Financial Services divestment study
Technology can enable better divestment outcomes
Financial services companies have no choice but to refocus their portfolios of business assets and strategic divestments play a key role in achieving this goal. Along the way, technology can also serve as a crucial enabler. Exploiting data and analytics tools to understand the value in a business, both today and in the future, can help to identify the right assets to divest or retain. These tools can be leveraged throughout the divestment process to secure greater value and deal efficiency.
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