M&A is, and will continue to be, a driver of transformation in the financial services (FS) sector as incumbents look for strategic partnerships and consolidation opportunities to boost digital capabilities, counter the disruption from platforms and fintechs, and address sustained pressure from regulators.
FS dealmakers nonetheless face challenges from the current uncertain macroeconomic market environment, including slowing GDP growth, inflation, higher interest rates and disruption resulting from the Russia–Ukraine conflict, and fallout from cryptocurrency failures. Other factors compounding these challenges include supply chain disruption in the real economy, indirectly also affecting the FS industry, competition for highly skilled talent, and accelerated digital and cloud transformation. Business owners have not faced such pressures with such intensity before.
Transactions have become more complex, and this is requiring FS dealmakers to consider different scenarios and create robust value creation plans. The greatest M&A opportunities in FS will likely exist in customer-led transformation; supply chain; operations; cloud; finance transformation; and environmental, social, and governance (ESG). While the M&A market will likely remain difficult in 2023, we believe the FS sector will afford dealmakers many opportunities to execute on their strategic goals, albeit in a more disciplined and cautious manner.
“The FS market will continue to see transactions take place in 2023. Although dealmakers need to expend greater effort to analyse and optimise each deal situation, I believe that investors, especially corporates, who act on very selective opportunities will shape their own future.”
M&A hot spots
We expect the following areas to be hot spots of M&A activity in the next six to 12 months:
Fintechs: Corporate and private equity investors remain interested in fintech companies as part of their digital transformation or investment strategy. However, fintechs are also under pressure given the current market environment, including inflation and interest rate developments, and have lost value compared to last year. This might lead to some opportunistic M&A among large banks, which may be able to acquire attractive assets at lower valuations than previously possible. Fintechs unable to secure further rounds of venture capital funding may seek a buyer, leading to some distressed M&A activity and possibly to some fintechs simply disappearing from the market.
Private equity: Private equity (PE) investors with increasing specialisation in FS, dedicated FS teams, and increasing fund volumes are focusing on FS and FS-related topics such as insurance brokerage, payment, platforms, fintech, insurtech, and regtech. Hence, we will continue to see M&A activity in 2023. However, with PE investors facing greater pressure on returns due to the higher cost of capital, a focus on value creation will be more important than ever.
Consolidation: Traditional business models are being disrupted, as illustrated by the growth of platforms and embedded finance solutions, along with changing client needs and increased competition. Scale is essential to creating a viable business model, and we expect further consolidation to take place, especially in the more fragmented sectors where market players need to reposition to benefit from economies of scale and scope.
M&A resets to pre-pandemic levels in 2022
Financial services deal volumes and values, 2018-2022
Sources: Refinitiv, Dealogic and PwC analysis
Global M&A volumes and values in financial services decreased between 2021 and 2022 by 17% and 42%, respectively. The decline was consistent with the broader M&A market, which came off a record year of dealmaking in 2021 and quickly changed. Macroeconomic and geopolitical headwinds grew, and the financial services sector was affected by the war in Ukraine and resulting sanctions, creating greater uncertainty among dealmakers. Despite the challenging dealmaking market, M&A activity in 2022 reset to pre-pandemic levels. The decline in deal values was greater than the decline in activity, partly due to a decline in megadeals—transactions with a value in excess of US$5bn—which decreased between 2021 and 2022 by more than 75%, from 21 to five, respectively.
Key themes driving M&A activity in 2023
Environmental, Social and Governance (ESG)
In addition to ESG regulations, FS companies face mounting pressure from a diverse range of stakeholders—including employees, customers, value chain partners, investors, nongovernmental organisations, and the media—to consider ESG in their business and investment decisions. While risk and return were historically the two dimensions that investors and management used as their primary gauges for performance, ESG now is a third dimension. According to PwC’s Global Investor Survey 2022, investors view sustainability as a priority for companies, and it is too important to be treated as a mere add-on. Instead, sustainability should be embedded into business strategy and processes for making decisions about capital allocation, investment, and other activities involved in strategic execution.
Digital transformation and technology
Digitalisation remains a strategic priority despite the economic slowdown, as banks and other financial institutions address consumer expectations and increased operational complexity and seek to build market position against the backdrop of disruption from fintechs and non-FS companies. We expect that M&A, partnerships, and strategic alliances in 2023 will be focused on deals to leverage data, implement solutions to address rising cybersecurity concerns, drive operational efficiencies, and speed up transaction processes.
Restructuring
FS clients currently seem to be less affected by customer loan defaults, among both retail customers and corporates, than expected during the pandemic and the subsequent economic slowdown. Should the challenging macroeconomic conditions be protracted, we may observe more restructuring measures among FS players, such as divestment of non-core assets and nonperforming loans (NPLs) in the banking industry—despite a much better capitalisation than in the global financial crisis of 2008—and the establishment of runoff platforms for life insurance businesses.
Global M&A trends in financial services
Asset and wealth management (AWM)
The AWM landscape continues to evolve. While AWM companies seek M&A opportunities for various reasons, all are leveraging transactions to react to slowing revenue growth and shrinking margins. To explain the current trends in the industry, a distinction between asset management and wealth management is necessary.
Asset management firms are driving growth through acquisitions, with a focus on core capabilities. We expect to see M&A in 2023 due to the following trends:
Chase for scale through M&A and transformation: Margin pressures are forcing companies to scale inorganically or bolt on new capabilities to access new segments and markets.
Growth of private markets: Demand for higher and non-equity-correlated returns will likely drive strong investor flows to private markets.
Need for scale among large exchange-traded fund providers: An ongoing focus on fees, especially among retail consumers, will continue to drive the popularity of passive products and vehicles, leading to highly commoditised asset classes.
Acquisition of newly required ESG core competences: We expect to see an uptick in M&A activity, particularly among US asset managers who may acquire ESG capabilities and assets from European asset managers for geographic diversification and to grow profitable assets under management.
Incorporate fintech to diversify business offering or as a means of survival: It is likely that innovations brought by the fintech sector will continue to transform the sector.
The wealth management industry has strong local characteristics, business models, and brands. As a result, M&A in wealth management follows different trajectories in different countries, with the following trends likely in 2023:
Enter new markets by accessing distribution capabilities of consolidated networks of relationship managers.
Expand international footprint and create hubs in strategic markets, particularly in Europe, to increase high-net-worth individual (HNWI) clients.
Strengthen local presence by acquiring specialised players in HNWI segments.
Accelerate growth through acquisitions backed by a private equity firm to become a market leader.
Entering strategic alliances with other market players, such as in other territories, to benefit from key partners and to complement one another as well as to gain greater market power.
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Banking and capital markets (BCM)
We see the banking M&A market being negatively affected by geopolitical issues, inflation, and concerns about global GDP growth. The slowing of deals activity in 2022 will likely continue during the first several months of 2023.
However, in the near to midterm future, the banking market overall is expected to exhibit the following key market trends:
Digital banking adoption is growing. Governments, customers, and shareholders are pushing for greater adoption of digital financial services and broader modernisation in the industry.
ESG is increasingly emerging as a key reputational issue.
- Various regulations that differ between territories and subsectors will affect deal activity in different ways. For example, in the United States, greater regulatory scrutiny and longer review processes are causing dealmakers to put more emphasis on deal preparation and developing a robust value creation plan. In the United Kingdom, the increased focus of the Financial Conduct Authority on potential competition and financial stability risks is likely to affect some M&A activity, particularly investments by technology companies in the FS space.
Given these trends, we observe the following M&A outlook:
Technology capabilities remain central to M&A strategies as banks face internal challenges and shareholder pressures to optimise and digitalise their business models. This is spurring banks’ attempts to modernise their operations by acquiring new digital capabilities and investing in cloud technologies. Furthermore, the growth of the digital economy fosters partnership opportunities with digital distribution channel partners.
Consolidation of the highly fragmented industry continues, especially at the mid-tier regional bank level.
- Banks selectively dispose of non-core assets and retreat from certain businesses to reduce complexity and streamline their organisational structures, sharpen their operational focus, and free up capital for reinvestment in higher-growth areas.
- Potential for distressed M&A as banks divest NPLs to strengthen balance sheets and improve capital ratios.
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Insurance
Insurers’ overall financial performance and business models are being heavily affected by inflation and higher interest rates in the following ways:
Inflation effects:
Premiums are lagging behind inflation rates. Insurers struggle to increase their pricing at the same pace as inflation. Property and casualty insurers are facing particularly strong product pricing challenges.
High inflation in goods and services is driving up costs of personal insurance claims. The non-life segment is more affected than the life segment, especially through property and motor claim costs.
Operational expenses are increasing because labour costs, a key component of insurers’ operational expenses, are being driven up further by wage inflation.
Interest rate effects:
Changing policyholder preferences may result in higher demand for products supported by higher interest rates, such as guaranteed savings.
Disintermediation risk as rapid interest rate rises may result in policyholders surrendering policies faster.
Given these trends, the need to accelerate transformation for insurers has never been greater. In this challenging environment, it is time for insurers to clearly define their core business.
Insurers should develop and deploy a transformation plan to improve their customer value proposition and profit/cost model. In addition, insurers should decide which business areas will drive future growth and should be retained, and which to exit or dispose of, with the aim of deriving the greatest value from the divestment.
Furthermore, we envisage strong M&A activity in the insurance broker sector. Several insurance brokers held by their founding and private owners, or representing the acquisition platform for private equity firms, are already in the process of significantly consolidating the market of small, mid-tier and peer-sized players.
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Financial Services M&A 2023 outlook
For all the near-term volatility from macroeconomic and geopolitical disruption, we see positive signs for a potential uptick in M&A and for an ongoing or even improved deal flow in the course of 2023. Besides digesting recently completed deals, FS players need to think about how to further transform their business models to meet current and future challenges. M&A is an essential part of the transformational journey, either by acquiring businesses to drive future growth or by divesting less profitable or non-core businesses to sharpen the operational focus of organisations.
About the data
We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 31 December 2022 and as accessed on 2 January 2023. This has been supplemented by additional information from Dealogic and our independent research, and includes data derived from data provided under licence by Dealogic. Dealogic retains and reserves all rights in such licenced data. Certain adjustments have been made to the source information to align with PwC’s industry mapping.
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Global and EMEA Asset & Wealth Management Deals and Strategy Leader, Partner, PwC Italy
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