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 portfolio approach to their M&A strategy will also use divestitures as a way to improve operations and recalibrate business models.
Read our subsector trends
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
- 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 as balance 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 the insurance and 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 are at 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 the banking and capital markets and asset and wealth management sectors.
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 the banking and capital markets and insurance sectors.
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.
Explore our local M&A Trends in Financial Services from the following countries or regions:
Want to know the M&A trends we expected in Financial Services at the beginning of 2023?
Contact us
Global and EMEA Asset & Wealth Management Deals and Strategy Leader, Partner, PwC Italy
Contact us
