As banks, insurance companies and asset managers endeavour to optimise cost structures, grow the top line and increase efficiency and margins, acquisitions and divestitures are set to gather even more momentum in the next few months. Regulatory pressure, disruption from platforms and fintechs, rising interest rates and ongoing digitalisation are creating fertile ground for transformation. Against this backdrop, M&A activity in 2022 is likely to focus on forming strategic partnerships and ongoing consolidation.
Key themes driving M&A activity
Digital transformation & technology
Given growing consumer expectations and operational complexity, there are no signs that accelerated digital transformation is going to slow across financial services. As players in the industry strive to build market position in the face of disruption from fintechs and companies outside financial services, corporate strategies continue to revolve around acquiring tech capabilities.
This is why we believe mergers and acquisitions, partnerships and strategic alliances in 2022 will focus on capability-driven deals to squeeze more out of data, implement solutions to counter mounting cybersecurity concerns, drive operational efficiencies and accelerate transaction processes.
Embedded finance
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.
ESG: A success factor in transactions
As demand for sustainable investments increases, the asset and wealth management sector is playing a leading role within financial services in responding to the complex requirements of ESG. The insurance and banking sectors are now set to step up their involvement in providing financial infrastructure to underpin the green transition. At COP26, 450 financial institutions representing roughly 40% of global banking assets committed to aligning their lending and investing to net-zero emissions by 2050. As ESG-compliant targets attract considerable interest, these actions are likely to redefine the way risks are managed and value is created in the financial services industry.
Distressed M&A
With government aid coming to an end and non-performing loans (NPLs) on the increase, banks and insurance companies are likely to be confronted by a degree of market volatility. As banks look to divest NPL assets as a means of optimising their asset base, balance sheet and capital ratios, there’s a chance that growing demand from specialised investors will foster distressed M&A.
Another trend we see is players in financial services focusing their operations on domestic and core markets. This is likely to result in an increase in deals in the next few months around the sale of non-core and unprofitable business and the establishment of run-off platforms for life insurance.
Financial services deal volumes and values: EMEA
Financial services deal volumes and values, 2019-2021
The fact that economic growth in Europe has been disrupted by further COVID-related restrictions means that M&A activity is likely to be slower in early 2022. Because of continuing asset quality and profitability challenges in the EMEA region, we have seen relatively few commercial banking deals. Dealmaking has picked up in speciality finance areas, and we believe there are opportunities for emerging intermediaries to lead activity, particularly if the economic recovery gathers speed.
The quarterly development of deal volume and numbers confirms this view and shows that activity has flattened at a consistently high level, driven in particular by high volumes in the asset & wealth management sector.
What are the M&A trends in the Swiss financial services industry?
With regard to Switzerland, I see the following six trends that will shape the M&A activity in the near future:
- Small private banking players will continue to face pressure, but will not allow themselves to be rushed into a sales process: Our recent studies on Swiss private banking confirmed that a) NNM growth is achieved by larger players, while small to mid-size banks struggle to attract NNM, b) small private banks are consistently destroying value as they clearly miss their cost of capital goals and c) the cost-income ratio of small private banks is significantly higher than larger private banks or retail banks of comparable size. However, even though the pressure exists, many smaller private banks are still profitable, and there are other, non-financial reasons that limit the appetite of owners for selling their business via sales auction processes. Instead, they rather target other options including partnerships or friendly bilateral deals.
- Large international private banks will drive cross-border deal activity: Recent deal flow included UBS & CS exiting Austria, UBS selling their Spanish PB business to Singular Bank and acquiring Wealthfront USA, LGT acquiring Liqid, to name just a few. This shows that deals are driven with the intent to a) focus the business towards core markets and b) add capabilities to transform the business model for the digital age.
- Independent asset managers react to new regulations with increased deal flow via consolidation: As of the end of 2022, IAMs will need to undergo a licensing process under FINMA regulation. This will drive up compliance-related costs and may trigger smaller players to sell or partner with larger IAMs. At the same time, we currently do not see significant appetite on the part of such players to sell their business to banks.
- Deal activity in the consumer finance, personal loans, cards and BNPL industry will continue on an already high level. This is partly driven by opportunities for technological innovation in the interaction between lenders, customers and brokers as well as the search for yield in a low interest environment. Key players like Cembra or Cornerbank are likely to show increased appetite for further strengthening and expanding their market position inorganically.
- Insurance deal flow remains focused on cross-border transactions but will see increased deal flow also in insurtech: Stay tuned for an in-depth market study soon to be released focusing on insurtech activities in the Swiss insurance market.
- ESG is driving deal flow in the asset management space: Investor demand for ESG-compliant investments is driving the need to bring ESG expertise and product offerings in-house.
Overall, there are plenty of factors indicating that deal flow will continue to thrive. Independent of the economic environment, M&A will continue to be at the core of many financial services players’ growth and transformation strategy.
“Financial services companies, regardless of their size and sub-industry, have plenty of reasons to keep an eye on M&A as a core element of their growth and transformation strategy. Therefore I see M&A activity continuing to thrive in Switzerland and abroad.”
Looking ahead: changing customer needs, increased competition and distressed M&A will continue to define dealmaking in FS
The fact that financial services companies are under such pressure to adapt to changing customer needs, coupled with growing competition in the industry, will continue to influence M&A activity this year. Key developments include asset and wealth managers looking to expand into new asset classes, banks being forced to modernise by implementing new digital solutions, and insurance companies seeking opportunities to divest non-core assets or refocus their core competencies. Although activity continues to be defined to a large extent by a process of consolidation in what is a highly fragmented industry, in certain subsectors we’re seeing the emergence of new business models, particularly among fintechs, insurtech and regtechs. Here the targets are often highly attractive, but the multiples are high. This puts more at stake for investors, who need a value-creation mindset to get the most out of their investment.
#social#
