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Financial services M&A: booming across sectors thanks to postponed deals and new transactions

Marc Huber Advisory Director, Deals Financial Services, PwC Switzerland 14 Sep 2021

Mergers and acquisitions in the financial services (FS) industry continue to boom as players compete for strategic market advantage – with the focus on transformation. Activity in the first half of 2021 was led by deals for technology and innovation. With banks, insurance companies and asset managers looking to optimise cost structures, boost top-line growth and increase efficiency and margins, we expect acquisitions and divestitures to further gain momentum in the coming months. Forced to contend with low interest rates, regulatory pressure, disruption from new platforms , fintechs and digitalisation, the sector is likely to increasingly seek strategic partnerships and continue the process of consolidation. In addition, there is potential for distressed M&A as COVID-related support runs out and the implications for banks and insurance companies become clearer. These are some of the main findings of PwC’s main global M&A insights for FS. What about the prospects in Switzerland?
Digital transformation & technology

With consumer expectations and operational complexity growing, there’s no sign of deceleration in the rate of digitalisation across the financial services industry. Under pressure to get the most out of data, drive operational efficiencies and speed up transaction processes, we’re likely to see more players in FS engaging in deals and partnerships.

Ongoing digital transformation and technological solutions will create new opportunities for outside investors such as private equity funds and big tech.

Disruption of traditional business models

Embedded finance is the name of the game: the growing trend for businesses to integrate financial services seamlessly into their business models. This development will intensify. We’re also going to see FS corporates engage in dealmaking and acquire start-ups in an attempt to build their capabilities as tech giants such as Apple, Google and Amazon continue to move into the finance space.

Another factor driving M&A will be the need for corporates to compete with fintechs, which in some cases have an advantage because their business faces fewer restrictions from complex legacy systems, fewer brand awareness concerns and in some cases a lower level of regulation than traditional FS players. 

We’re also expecting to see the trend to growing consolidation and collaboration in the industry continue, particularly in retail banking, where low interest rates, regulation and expensive-to-operate business models are affecting profitability.

ESG: A success factor in transactions

ESG has gained enormous momentum, and ESG criteria continue to redefine value creation and risk management in financial services, a trend which is driving sustainability-related deals to acquire ESG assets and expertise. As regulations get tighter, we’re also going to see clear ESG reporting and track record becoming even more important in mergers and acquisitions deals.

Asset and wealth management lead the way in the financial sector’s ESG transformation, with consumer demand for sustainable investments having a significant influence on strategy, reputation and performance. With the insurance sector continuing to stage a sustainability transformation of its own, and the prospect that non-ESG-compliant products will attract heavier risk weightings, we expect to see ESG having a growing impact on deals in the industry in the months to come.

Distressed M&A

As pandemic-related government support runs out, players in financial services, especially banks and insurance companies, are likely to be confronted by market volatility. This will result in distressed assets, although the scale is not yet known.

Banks are likely to face growing levels of non-performing loans (NPLs), leading to distressed M&A activities and deals as players look to optimise capital ratios by selling these assets to specialist investors.

Another trend likely to drive activity is efforts to concentrate on domestic and core markets, with FS players selling off non-core and unprofitable businesses.

Financial services deal volumes and values: EMEA
Source: Compliance Risk Management: Appling the COSO ERM Framework, November 2020.

During the first lockdowns in Q2 and Q3 2020, EMEA deal volumes slowed down significantly due to the level of uncertainty on how severely COVID would influence the performance and risk profile of financial services institutions. Such fears have, in many cases, not come true; instead, booming stock markets, high transaction volumes and available liquidity have driven deal volumes up and beyond volumes seen prior to the pandemic. We expect M&A activity to remain high as market consolidation continues, and in some cases also as a result of distressed M&A.

What are the M&A trends in the Swiss financial services industry?

Mirroring global market trends, M&A activity in Switzerland was high over 2020 and the first half of 2021, and is expected to remain so for the foreseeable future. As such, fears of COVID having negative impacts on the Swiss FS industry have not materialised, which is also reflected in the fact that the prices paid on deals remain at the high level of the pre-COVID period or are even exceeding such levels.

Nevertheless, banks and insurance companies are facing major challenges, and it is a critical time to act to face these challenges and identify new opportunities – organically and also through M&A.

For further details of the six trends that we see currently shaping the Swiss financial services market, I recommend our recent study on “How to capture opportunities in disruptive banking and insurance”, focusing on: 1) changing customer needs, 2) consolidation and new market entrants, 3) partnerships and ecosystems on the rise, 4) digitalisation and emerging technologies, 5) new ways of working and 6) regulation and ESG. 

Download the full market study 

Looking ahead: consolidation, distressed M&A and value creation through new FS business models

A strong buy side led by a growing number of private equity (PE) investors and other motivated players such as FS corporates seeking to invest in the recovery through M&A is creating a deal-making landscape with many opportunities for mergers, acquisitions and divestitures – both domestically and cross-border. An additional factor that could potentially accelerate activity is distressed M&A as COVID support measures run out, interest levels remain low and the real economy faces liquidity problems. In Switzerland, this is becoming more apparent for small banks, which felt the impact of COVID more severely and have benefited less from net new money inflows than larger peers.

Dealmakers in certain areas of financial services have plenty of cash available to pick up the pace of mergers and acquisitions. Although this is still defined to a large extent by the process of consolidation going on in what is a highly fragmented industry, new business models in areas such as fintech, insurtech and regtech are also becoming very attractive investment opportunities. As is so often the case, successful investors will be those that adopt a value creation mindset.

“Looking beyond traditional business models and putting value creation at the core are key factors for successful M&A strategies in financial services.”

Marc Huber, Advisory Director, Deals Financial Services, PwC Switzerland

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Marc Huber

Marc Huber

Advisory Director, Deals Financial Services, PwC Switzerland

Tel: +41 58 792 1416