Competition for strategic market advantage continues to fuel mergers and acquisitions (M&A) across FS, with activity led by deals for technology and innovation. Acquisitions and divestitures are expected to gain momentum in the upcoming months, as banks, insurance companies and asset managers seek to optimise cost structures, grow the top line and increase efficiency and margins.
Facing pressure from regulators, disruption from platforms and fintechs, rising interest rates, and continued digitalisation, the sector is primed for transformation. We expect M&A activity to focus on the continued formation of strategic partnerships, ongoing consolidation and a higher level of distressed assets in 2022.
“Strong interest from investors of all kinds will continue to push the financial services M&A market upwards in 2022. In particular, I see potential for distressed assets from the banking and insurance sectors to produce a wave of deals.”
M&A hotspots
We expect the following areas to be mergers and acquisitions hotspots in 2022:
- Private equity (PE). Abundant PE capital will continue to be deployed to acquire a range of financial services targets, including a growing interest in life insurance and annuities and payments sub-sectors. Specialised PE players that focus on distressed assets are ready to act, as the impact from the pandemic on the real economy is reflected in the balance sheets and assets of FS corporates in the coming months.
- Divestitures. Continued portfolio optimisation through M&A in the first half of 2022 will prolong a 2021 trend whereby large FS corporates have identified unprofitable or non-core business components to divest. We are already seeing some smaller distressed FS corporate assets being brought to market, with larger deals expected in the upcoming months.
- Fintechs. Corporate and PE investors continue to be interested in fintech companies at higher multiples in payments, deposit and lending platforms. They are also acquiring insurtech, regtech, financial services IT, and digital assets, such as cryptocurrencies and tokenisation.
M&A activity and values
Financial services deal volumes and values, 2019-2021
Sources: Refinitiv, Dealogic and PwC analysis
Financial Services deal volumes and values increased between 2020 and 2021 by 21% and 40%, respectively, and 2022 started with deal activity remaining at elevated levels across all regions. The buoyant M&A environment in the first half of 2021 was helped by some pent-up deal-making demand from 2020 and extended into the second half of the year as optimism increased around the economic recovery, creating a robust deals pipeline. The number of financial services deals which had private equity involvement increased during 2021 to 30%, up from the average over the previous five years of 20%, reflecting the growing importance of PE in the sector.
Deal values were boosted by several megadeals—those with a deal value greater than US$5bn—particularly in the leasing, regional banking, fintech and insurance sectors, and also as a result of the fierce competition between corporates, PEs and special purpose acquisition companies (SPACs) for certain digital and technology targets.
Key themes driving M&A activity
Digital transformation and technology
Digital acceleration shows no sign of slowing down across sectors of the industry, as consumer expectations and operational complexity grow. Technology capabilities remain central to corporate strategies 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 2022 will be focused on capability-driven deals to leverage data, implement solutions to address rising cybersecurity concerns, drive operational efficiencies, and speed up transaction processes.
Embedded finance
Embedded finance, the growing trend whereby businesses can seamlessly integrate financial services into their business models, is set to increase in intensity. As tech giants like Apple, Google and Amazon continue to expand their financial offerings, retailers such as Walmart and Ikea are also making inroads—partnering or making acquisitions which enable them to offer financial services to customers. FS corporates, such as card-issuing banks, are likely to build capabilities through M&A in 2022 to compete with fintechs in growing areas such as the Buy Now, Pay Later (BNPL) space.
Environmental, Social and Governance (ESG)
The asset and wealth management (AWM) sector is leading FS in responding to many of the complexities of ESG, following increased demand for sustainable investments. Now, the insurance and banking sectors are set to play a greater role in providing financial infrastructure to support the green transition: at COP26, a consortium of 450 financial institutions, representing roughly 40% of global banking assets, pledged to align their lending and investing to net-zero emissions by 2050. We expect these actions will redefine both risk management and value creation in the FS industry, as ESG-compliant targets generate significant interest.
Distressed M&A
We anticipate that FS players, particularly banks and insurance companies, will face a degree of market volatility, as state-aid measures end and non-performing loans (NPLs) increase. Increasing demand from specialised investors may foster distressed M&A activities and portfolio transactions, as banks seek to divest NPL assets to optimise their asset base, balance sheet and capital ratios.
As FS players concentrate their operations on domestic and core markets, we also expect increased deal activity in upcoming months related to the sale of non-core and unprofitable businesses and the establishment of run-off platforms for life insurance businesses.
Global M&A Industry Trends in Financial Services
Asset and wealth management
Deal-making in asset and wealth management continues to thrive as investors are attracted to the significant future growth prospects and track record of delivering superior risk-adjusted returns. Global clients’ wealth and global assets under management (AUM) are expected to grow to US$318tn and US$139tn in 2025, respectively, with Asia-Pacific expected to see the highest growth compared to other regions.
Increased focus on ESG and investor demand for sustainable investment options is causing AWM firms to re-evaluate product design, fund allocation and performance objectives, which will likely translate to further M&A.
Asset management
- The market remains highly fragmented, and further consolidation is likely, especially for large asset managers who, facing margin compression, are looking to acquire, motivated by cost-cutting and economies of scale.
- We expect many asset managers will evaluate M&A opportunities within alternatives, which we believe could become a significant driver of deal activity—more so than typical forces such as opportunities for cost synergies and economies of scale. Some midsized firms may struggle to balance their need to grow with their desire to build capability in these higher-growth alternative asset classes.
Wealth management
- Wealth management companies are evolving from a pure product-based advice model to a goal-based advice model, due to increasing demand for multidisciplinary skills (such as corporate finance, tax advisory, art advisory) and ‘one-stop shopping,’ where clients can invest in various asset classes without investing across multiple firms.
- Large wealth management players are turning their attention to investing in smaller, more strategic partners, to help fill gaps in their product offerings and acquire key capabilities, such as the technology necessary for players dealing with upper-affluent and high-net-worth individuals (HNWI).
- Emerging private banking hubs in Europe (i.e., Switzerland, Luxembourg, Lichtenstein) and Asia (i.e., Singapore, Hong Kong, Guangzhou) will drive consolidation and further development of these districts.
Banking and capital markets
An economic outlook buoyed by fiscal stimulus and increased bank earnings (partly from credit provision releases) has provided a new impetus to deal-making and consolidation, particularly in the US.
- The current landscape is forcing banks to transform quickly and modernise by investing in cloud transformation due to increased competition, changing customer needs, and long-term headwinds, such as low interest rates and profitability pressures.
- We expect to see continued interest from banks to acquire digital players with scaleable and highly customer-centric business models.
- The growth of the digital economy is fostering partnership opportunities with digital distribution channel partners (e.g., platforms) that create transaction flows and financial services opportunities, such as consumer lending through B2C digital channels.
- There is increasing pressure on banks to exit business lines where they do not have a competitive advantage. For example, a number of overseas banks in Europe and Japan are selling their ownership in US retail banks to reinvest either at home or in more favourable markets.
Asia-Pacific
Asian banks were in a more advantageous position in terms of profitability and growth, but a lack of deal supply restricted M&A activity in 2021. In 2022, further domestic consolidation remains a prospect as valuations recover. But some sellers appear to be holding out for higher prices down the line.
Europe, the Middle East and Africa (EMEA)
- Economic growth in Europe has been disrupted by further COVID-related restrictions, which will likely slow M&A activity in early 2022. The enduring asset quality and profitability challenges in the EMEA region have meant that we have seen relatively few commercial banking deals.
- European banks may struggle to catch up with their stronger US and Asian peers without radical change to close the gap between returns and cost of equity. This requires banks to move towards a more ‘asset light’ and ‘capital light’ model, cut costs and improve returns, and meet customer expectations for convenient and secure digital banking. Many will use M&A to help with this transition, either through acquiring new digital capabilities or divesting assets from their balance sheets.
- M&A activity has picked up in speciality finance areas, and we see opportunities for emerging intermediaries to lead activity, particularly if the economic recovery accelerates.
The Americas
- The economic recovery and rebound in balance sheets in the US has propelled banks’ share prices and given them the currency to pursue acquisitions. At the same time, corporates across the Americas continue to re-evaluate their portfolios and exit non-core activities. The strong demand and refreshed supply have boosted transaction activity, with these trends likely to endure throughout 2022.
- However, high valuations may dampen buyer enthusiasm as expected returns diminish. Dealmakers will need to pay close attention to the fundamentals to create value.
- We expect further regional banking mergers, as banks continue to look for expense synergies. Larger banks will continue to purchase speciality businesses to fill gaps in their offerings.
Insurance
In the global insurance market, record levels of deployable capital and continued investor interest in insurance carriers and distributors are boosting M&A activity, especially in the US market.
- We expect private equity firms and asset managers will continue their push into the insurance sector, specifically in the life insurance and annuity space, as large insurance carriers seek to divest non-core assets.
- Increased interest in acquisitions from mutual insurers reflects the desire to acquire blocks of business, as they seek to grow and offer new products.
- Ongoing brokerage consolidation is expected to continue apace. Several specialised PE players are focusing on the insurance brokerage sector, using a roll-up strategy to gain scale.
- Enthusiasm for insurtech IPOs has recently waned due to lower post-IPO performance. While operating profits may have fallen short of expectations which their market cap created, the underlying technology and data-collection opportunities remain attractive. As such, we expect overall investor interest in the insurtech space to remain high, both from PE investors and corporates that are looking to bolster their technology and client offerings.
M&A outlook for financial services
Pressure to adapt to customers’ changing needs and increased competition in the industry will continue to impact M&A in 2022. Asset and wealth managers are looking to expand into new asset classes, banks are being pushed to modernise by implementing new digital solutions, and insurance companies are looking for opportunities to divest non-core assets or refocus core competencies.
While activity is still largely defined by the consolidation of a highly fragmented industry, new business models are emerging in sub-sectors, especially among fintechs, insurtechs and regtechs. Although targets in these sub-sectors are often highly attractive opportunities, high multiples raise the stakes for investors, who increasingly need to adopt a value-creation mindset to maximise their return on investment.
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 2021 and as accessed on 2 January 2022. This has been supplemented by additional information from Dealogic and our independent research, and includes data derived from data provided under license by Dealogic. Dealogic retains and reserves all rights in such licensed data. Certain adjustments have been made to the source information to align with PwC’s industry mapping.
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Christopher Sur
Global, EMEA and Germany Financial Services Deals Leader, Partner, PwC Germany
Francesco Legrenzi
Global and EMEA Asset & Wealth Management Deals and Strategy Leader, Partner, PwC Italy
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