Financial services (FS) companies have experienced a turbulent few months, which has muted M&A activity in the sector during the first half of 2023. Several central banks, including the US Federal Reserve, the European Central Bank, and the Bank of England, continued to increase interest rates in an attempt to tame inflation. This, along with a number of related bank failures, has further fuelled market uncertainty, not only in the banking sector but also across the FS sector and more broadly.
The FS sector is significantly exposed to the need for transformation. Incumbents face an uncertain macroeconomic market environment; sustained pressure from regulators; growing concerns related to environmental, social and governance (ESG) factors; and disruption from platforms (including embedded finance) and fintechs. Technology itself could lead to more disruption for the sector by way of new generative AI–developed use cases. All this is creating an even more urgent need for FS companies to consider more transformational steps towards digitalisation, ESG, and portfolio optimisation.
M&A will play a crucial role in the FS sector’s transformational journey. The FS sector comes with its own unique set of challenges, due in part to its highly regulated nature, which makes it more difficult to successfully execute on transformational measures. We expect companies across the FS sector to use a series of smaller acquisitions to enhance capabilities and to drive future growth through economies of scale and scope, especially in the current macroeconomic environment where organic growth faces severe challenges. FS companies that take a will also use divestitures as a way to improve operations and recalibrate business models.
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Banking and capital markets
Insurance
Asset and wealth management
‘Transformation is continuing to drive M&A activity across financial services—although in response to economic challenges, I see dealmakers using smaller transactions to achieve more transformational steps towards digitalisation, ESG, and portfolio optimisation.’
- Banking and capital markets
- Insurance
- Asset and wealth management
Banking and capital markets
- The recent banking developments will likely have implications for M&A in the banking and capital markets sector, not only in the US but also in other countries. The stresses in the banking system caused by the recent failures of three US banks, together with the broader macroeconomic environment, may put several small and medium-size banks under greater pressure and result in further consolidation over the coming months.
- Recent interest rate increases by several central banks have created for banks both upsides (in the form of increased interest income) and downsides (through the realisation of valuation losses in the banks’ investment portfolios). Although the recent banking failures in the US can be largely attributed to a unique set of circumstances, such asbalance sheet mismatches, these events highlight the need for banks to continuously evaluate and adapt their liquidity risk and interest rate risk management practices, especially during challenging economic conditions. The loss of consumer confidence, followed by the depletion of these banks’ liquidity and capital position, raises questions regarding the overall vulnerability of the banking sector. Greater regulatory scrutiny of banks’ own risk management policies and procedures will likely increase operating costs. As such, we expect further consolidation among banking players, particularly regional banks that may seek to build scale to offset higher costs from operating under a more complex and tougher regulatory environment.
- We expect due diligence will expand to address areas such as governance and risk management, resilience of the business model to external factors, inherent risks in third-party ecosystems, and others. Such deal processes will likely take longer, and the analysis will be more complex.
- In addition, restructurings are expected to gain momentum; in the current market environment, banks tend to reduce their lending volumes, which might cause financing problems for businesses going forward. We are already seeing signs of stress in some sectors, such as the commercial real estate sector. This may, in turn, affect the credit quality within the balance sheets of banks. As a consequence, we believe banks will likely consider portfolio transactions to divest non-performing loans or non-core assets as a way to strengthen their balance sheets and improve capital ratios.
Read our key trends for theinsuranceand asset and wealth management sectors.
Insurance
M&A activity in the insurance sector stayed resilient in the first half of 2023 and is expected to remain so for the rest of the year. There are several factors leading to this healthy level of activity:
- We expect to see portfolio optimisation create deal flow in the second half of 2023 as insurers look to simplify product offerings and reduce complexity in their operations.
- The disposal of complex legacy portfolios, which attract high capital charges, offers insurers the opportunity to reduce costs, improve capital efficiency and redeploy capital to core activities whilst offering specialist consolidators the ability to drive economies of scale.
- Dealmakers, especially private equity–backed players, remain keenly interested in the highly fragmented insurance broker market, and we expect further consolidation, which will keep M&A activity strong. Countries such as France and Germany areat the beginning of a consolidation phase, similar to those that started in the US and UK around 20 years ago, in which acquisitions of brokerage firms by rivals and the arrival of new consolidators—many backed by private equity—are becoming a regular occurrence. Investors are attracted to the commercial property insurance broker market due to its growth prospects in the coming years, as well as due to various consolidation opportunities enabling synergies and economies of scale, a generally favourable regulatory environment, and a market that typically generates high margins and stable returns.
Read our key trends for thebanking and capital marketsandasset and wealth managementsectors.
Asset and wealth management
- We expect asset and wealth management (AWM) deal activity to remain robust during the second half of 2023, following a similar pattern to the first half of the year. Many AWM companies continue to use M&A to gain scale and grow as a means to counter slowing organic revenue growth and increased margin pressures. Others are using M&A to acquire new capabilities, access new segments (e.g., crypto assets) and further diversify their business into different asset classes and distribution channels. AWM companies continue to acquire, either through M&A or through strategic alliances, access to digital capabilities that will enable them to drive digital transformation, enhance efficiencies, and improve customer experiences.
- With the current pressure on US regional banks, there is a unique opportunity for alternative asset management firms to step in and fill a void through their private lending arms. We expect this will lead to further deal activity in private credit.
- Private equity interest in registered investment advisers (RIAs) triggered a new wave of platform deals in the first half of 2023. We expect this trend, along with further consolidation among wealth managers, to continue in the second half of the year.
- ESG remains a catalyst for deals in the AWM space, and we expect to see an uptick, particularly in sustainability-oriented investments, in the second half of the year. For asset managers, integrating sustainability principles into the heart of their purpose, strategy and investment management process is necessary to meet regulatory requirements and customer expectations.
Read our key trends for thebanking and capital marketsandinsurancesectors.
2023 mid-year M&A outlook for financial services
In spite of the turbulence seen over the past few months in the FS sector, we are optimistic that FS players will use M&A as a catalyst for the transformation of their business models to meet current and future challenges. We see portfolio optimisation and the continued consolidation of fragmented subsectors as the main areas for M&A activity in the second half of the year.
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Global and EMEA Asset & Wealth Management Deals and Strategy Leader, Partner, PwC Italy
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Greetings, I'm an expert in the field of financial services, particularly in the areas of mergers and acquisitions (M&A), banking, insurance, and asset and wealth management. With a wealth of experience and a deep understanding of the sector, I've closely monitored and analyzed the recent trends and developments that have shaped the financial services landscape.
In the past few months, the financial services industry has undergone a turbulent period, leading to a slowdown in M&A activities, particularly in the first half of 2023. Key players, such as the US Federal Reserve, the European Central Bank, and the Bank of England, have responded to economic challenges by increasing interest rates, contributing to market uncertainty. This, coupled with bank failures, has created an urgent need for transformation within the financial services sector.
The challenges faced by financial services companies include an uncertain macroeconomic environment, regulatory pressures, concerns about environmental, social, and governance (ESG) factors, and disruptions from platforms and fintechs. Technology, especially generative AI, is poised to introduce more disruptions, necessitating a shift towards digitalization, ESG integration, and portfolio optimization.
M&A is expected to play a crucial role in the sector's transformation, with companies using smaller acquisitions to enhance capabilities and drive growth amid challenging market conditions. The highly regulated nature of the financial services industry poses unique challenges to successfully executing transformational measures, making due diligence and strategic decision-making more complex.
Now, let's delve into the specific concepts mentioned in the article:
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Banking and Capital Markets:
- Recent banking developments, including failures and macroeconomic conditions, may lead to consolidation among small and medium-sized banks.
- Interest rate increases by central banks have both positive and negative effects on banks, influencing their interest income and investment portfolios.
- Regulatory scrutiny is expected to increase, leading to further consolidation, especially among regional banks seeking to offset higher operating costs.
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Insurance:
- M&A activity in the insurance sector has remained resilient, driven by factors such as portfolio optimization, simplification of product offerings, and consolidation in the insurance broker market.
- Private equity-backed players are actively involved in the insurance broker market, contributing to further consolidation, particularly in countries like France and Germany.
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Asset and Wealth Management (AWM):
- AWM deal activity is expected to remain robust, with companies using M&A to gain scale, counter slowing organic revenue growth, and acquire new capabilities.
- Private lending by alternative asset management firms presents opportunities in the current market environment for deal activity in private credit.
- Private equity interest in registered investment advisers (RIAs) is triggering platform deals, and ESG considerations remain a catalyst for deals in the AWM space.
In conclusion, despite recent challenges, the financial services sector is poised for transformation through M&A activities, focusing on portfolio optimization and consolidation in fragmented subsectors. These trends are expected to shape the industry in the second half of the year, requiring companies to adapt to the evolving landscape.