M&A trends in financial services: 2023 mid-year update

For the financial services sector, the first half of 2023 was challenging. In an attempt to combat inflation, most central banks raised interest rates. Alongside several bank collapses, this has amplified market uncertainty not just in banking, but throughout the financial services industry and beyond.

At the same time, the industry is under considerable pressure to transform. Incumbent companies grapple with a volatile macroeconomic landscape, higher regulatory scrutiny, increasing environmental, social, and governance (ESG) concerns, and disruption from new finance platforms and fintechs. Additionally, new applications of generative AI may prompt further upheaval. This environment underscores the need for financial services providers to take transformative actions that include digitalisation, ESG engagement, and portfolio optimisation.

Mergers and acquisitions will be pivotal in transforming the financial services sector. Given its high regulatory demands, the industry faces unique hurdles in implementing transformative strategies. We expect firms to pursue a series of smaller acquisitions to bolster (digital) capabilities and fuel growth through increased scale and scope. Financial service companies adopting a portfolio-based M&A strategy may also employ divestitures to enhance operations and fine-tune their business models. 
 

Global M&A trends in the financial services industry

Asset and wealth management (AWM)

For the second half of 2023, we anticipate robust M&A activity in the AWM sector, mirroring the trend since the beginning of the year. Some firms are leveraging M&A to grow and to counter slowing organic revenue and margin pressures. Others are using M&A to gain new skills, get into fields like crypto assets, and broaden their asset classes and distribution channels. 

Private equity’s focus on independent asset managers sparked a surge of platform deals in the first half of the year. We predict this trend – and increased consolidation among wealth managers – to continue in the coming months. Moreover, ESG principles remain a driving force for deals in the AWM space.

Banking and capital markets 

Recent banking disruptions amid rate hikes, including the failure of three US banks and the takeover of Credit Suisse by UBS, will likely influence global M&A activity and increase the pressure on several small and medium-sized banks. This highlights the need for improved risk management and suggests stricter regulatory scrutiny. Consequently, we expect more consolidation, especially among regional banks, to offset increased costs in a stricter regulatory setting.

In this climate, due diligence will expand to include aspects such as governance and risk management, the resilience of the business model to external factors, and the risks inherent in third-party ecosystems, which will complicate and lengthen deal processes. As banks reduce lending volumes and stress in sectors such as commercial real estate increases, banks may divest non-performing loans or non-core assets to strengthen their balance sheets.

Insurance 

Following resilient M&A activity in the insurance sector in the first half of 2023, we assume continued strength for the rest of the year. Anticipated portfolio optimisation will stimulate deals as insurers aim to simplify products and streamline operations. Disposing of complex legacy portfolios can help insurers cut costs, enhance capital efficiency, and refocus on core activities while allowing specialist consolidators to grow. 

Private equity-backed players are particularly drawn to the highly fragmented insurance broker market, suggesting further consolidation and sustaining strong M&A activity. Countries like France and Germany are in the early stages of a consolidation trend, similar to what the US and UK saw two decades ago. The commercial property insurance broker market appeals to investors due to its future growth potential, a favourable regulatory environment, high margins, and stable returns coupled with consolidation opportunities to achieve synergies and economies of scale.

Swiss M&A trends in the financial services industry

Asset and wealth management (AWM)

The Swiss private banking sector has seen limited M&A activity over the past six months. We expect this to continue, with a focus on weaker and smaller players potentially being taken out of the market. The activity we see picking up in this sector mainly focuses on the independent asset manager market, where some matchmaking is taking place and larger players are looking to acquire smaller ones. We expect this trend to take on further traction in the coming months. 

In addition, the flow of RMs and their clients triggered by UBS’s takeover of Credit Suisse has raised the hopes of a number of private banks to pick up AuM via team grabs, with the search for M&A opportunities as a secondary strategy. This may soon come to an end as UBS proceeds with the integration of CS, providing clarity on the future of client advisors and their clients.

Banking and capital markets

The Swiss banking and capital markets space is not being driven by significant deal activity, and the FinTech and crypto scene has also seen some difficult times over the past six months, with funding drying up and crypto prices remaining rather low. What we are seeing in the space is clearly a trend towards business model transformation and digitalisation, which is being addressed both organically and inorganically. However, there are many great solutions out there that can help a bank leapfrog its transformation and, due to lower valuations, provide a great opportunity for M&A.

Insurance

Although domestic insurance deal activity in Switzerland has remained quiet in the first six months of FY23, we note the continued strong appetite of Swiss (re)insurers to develop globally, both in Asia and Africa, where future growth is mainly expected to come from.

In the local insurance brokerage market in Switzerland, we see continued interest from global players and note the acquisitions of three local insurance brokers by US-based AJ Gallagher and UK-based Howden Group. Given the broader activity at the European level and the improved market outlook, we expect an impending consolidation within the more fragmented Swiss insurance brokerage market as some of the larger players seek to increase their market share not only in Switzerland but in the wider DACH region.

On a broader and final note, given the impact of this year's macroeconomic headwinds, including issues such as rising interest rates and inflation, we anticipate and remain curious to see more transformational deals coming to market. Insurers may look to adjust or re-establish their position in the market. Potential acquisitions of new lines of business, products, technology plays, entries into new markets, and operational restructuring are all on the cards.

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