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2022 banking and capital markets M&A outlook

Explore the trends reshaping M&A in the banking sector

Banking and Capital Markets (B&CM) mergers and acquisitions (M&A) activity is firing on all cylinders after impressive increases in deal volume and value in 2021. Though the year ahead won’t be without headwinds, there are many reasons to engage in dealmaking in 2022. Learn about the banking M&A trends and drivers that are providing profitable opportunities, keeping the M&A growth engine humming.

A snapshot of banking and capital marketing M&A in 2021

After a tough 2020, banking M&A rebounded with 210 announced transactions as of December 31, 2021—an 89% increase from the prior year’s 111 deals—and an average deal value of $693 million, a healthy rise from 2020’s average $546 million. 2021 also had the largest number of transactions over $500 million in enterprise value since the financial crisis going back to 1998. And 2021 was a banner year for megadeals as banks sought scale, capabilities, business lines, and markets to compete against larger rivals. The five largest announced deals all topped the $5 billion mark.

Investment management (IM) and wealth management (WM) deal volume as of December 31 increased 50% year over year—316 deals versus 210 in 2020. Volume again skewed heavily to asset management and wealth management versus broker-dealer transactions. Compared with 2020’s megadeals, IM/WM transactions were smaller, accretive acquisitions by firms seeking greater scale in current markets or expanding into areas offering higher returns. This focus is reflected in 2021 average deal value, which fell from 2020’s record-setting high of $1.08 billion to a more modest $536 million.

2021 M&A activity—both among fintechs and between banks and fintechs—again trended upward. Deal value for US-based targets as of December 31 increased 12% year over year to $1.16 billion, compared to $1.03 billion in 2020; deal volume rose 31% year over year, from 164 to 216 transactions. Investor groups were responsible for 2021’s largest announced US-based fintech deals, with fintechs offering insurance and health care technology, security technology, financial media and data solutions, and human resources and payroll technology popular targets.

Read the full review of 2021 across banking, fintech, and IM and WM—and see the future of banking M&A—by downloading the banking and capital markets M&A outlook for 2022.

Capabilities plays and restructuring for digital transformations

Overall competitiveness and positioning in B&CM spiked in 2021, with both defensive and offensive M&A tactics on the rise. According to Deloitte 2021 M&A Survey respondents, a top-priority B&CM defensive tactic for the year was acquiring capabilities, while top offensive tactics included capitalizing on disruptive opportunities and accelerating digital transformation.

Since the pandemic began, banks have led financial services and other industries in instances of restructuring. Survey results show that 72% of banks undertook restructuring initiatives since the pandemic began, and almost all of B&CM intends to at least consider it in the near term—which could be a trigger for subsequent M&A. Respondents’ primary reason for B&CM restructuring has not been cost-cutting; rather, it has been for digital transformation purposes.

In addition to addressing changing consumer preferences in how to conduct business, B&CM organizations are considering how digital transformation can support the M&A process itself. Pre- and post-close transaction planning and execution over the next year is projected to be substantially more virtual in B&CM, including integration.

Continued development of suitable merger partners at the regional level

One of the biggest headwinds in the banking M&A market at the regional level tends to be the dearth of suitable “in-market” merger partners to drive sufficient synergies to justify the purchase price premium. Over the past eight quarters, 13 banks with more than $10 billion in assets have been sold and removed from the candidate pool. But on the plus side, the corresponding period has seen an uptick in the number of total banks with more than $10 billion in assets. Continuation of this trend will drive future deal volume.

Stalled loan growth, soaring deposits complicate net interest margin improvements and mergers

Loan growth in the industry over the past eight quarters has been just 5.8%. Probing a bit deeper, consumer lending is up 2.4% during this period, real estate lending has grown 4.9%, and C&I lending is up only 1.2%. The primary source of loan growth in the banking industry during this period has been lending to non-depository financial institutions. When you layer on the fact that during that same period domestic deposits have grown more than 35%, it’s not surprising that cash holdings at banks have also risen more than 12%, held-to-maturity securities are up more than 82%, and available-for-sales securities are also up more than 39%.

The downward shift in net interest margins from 2019 to 2021 makes it challenging for banks to achieve the types of returns their stakeholders expect and what is included in planning documents to regulators. Margins at this level put pressure on management teams and boards and heighten the likelihood of leveraging an M&A partnership to improve the financial future of the enterprise. Franchises with a differentiated lending pipeline and product offering clearly have a valuation advantage in a market hungry for loan origination, especially with a glut of deposit dollars flooding the market.

More M&A around capabilities plays

Investment and wealth managers are on the hunt for acquisitions—especially smaller ones—to add digital technologies and/or help diversify their product and services portfolios. Target candidates typically sit at two ends of the spectrum: At one end, the illiquid alternative space is garnering significant attention, with real estate and private credit gaining steam. At the other end of the spectrum, indexing technology that enables product customization for investors is becoming an attractive purchase.

Strengthening digital engagement

IM/WM is a relationship-oriented business. Firms that can deliver on clients’ expectations for frictionless digital interactions will likely be more successful at growing and maintaining those relationships. Results from the Deloitte Center for Financial Services’ 2022 Global Outlook Survey show that 38% of respondents from digitally advanced firms expect significantly better revenue prospects in 2022 compared to just 13% for other, less digitally advanced firms, supporting the idea that digital interaction is part of the relationship.

The survey also shows that adding new technology capabilities is the top driver for respondents’ M&A transactions, followed by increasing scale and distribution channel expansion. These firms are looking to fuel growth through enhanced products and customer experience delivered to an expanded client (and prospect) base—a consistent trend from the previous year.

Tech and talent deals

The majority of 2022 fintech-related M&A likely will be driven by organizations’ growing technology and talent needs. Incumbent banks and IM/WM firms are on a quest for fintech products, people, and capabilities. Many B&CM organizations are struggling to attract the type of talent that can help them grow and keep pace with fintechs. They see M&A as the mechanism to quickly achieve key platform capabilities, customer acquisition, and talent goals.

Meanwhile, we expect fintechs to continue seeking funding sources to help them scale operations. They also are acquiring other fintechs to rapidly expand their capabilities and transition from niche players to end-to-end service providers, further disrupting incumbent financial institutions. Integration diligence and planning are critical to ensure that a newly acquired fintech’s products and people can be successfully integrated into the acquirer’s established environment and culture without destroying their value. Cultivating a deep understanding of a target’s business model, maturity level, and revenue drivers are key to enabling continued growth post-acquisition.

Growing crowd in the BNPL lending space

Payments, retail, and banking are converging in the buy now, pay later (BNPL) lending space, which provides point-of-sale financing products that allow consumers to split the purchase price at checkout, typically into four equal payments over a period of weeks or months. Major fintech BNPL lenders have seen rapid growth during the pandemic driven by the e-commerce boom and merchants’ desire to connect digitally with younger consumers, especially millennials and Generation Z, who are wary of taking on credit card debt.

Payments industry leaders are spending billions of dollars in M&A to include BNPL offerings among their growing global portfolios. Traditional banks are responding in force so they aren’t pushed out of the BNPL market by both payments companies and retail and technology giants. Installment loans are, by intent, meant for a single purchase, and banks are well equipped to turn this interaction into a long-term relationship by cross-selling products to consumers or capital to merchants. Community banks that lack the scale to run credit card businesses of their own see BNPL as a viable way to build a consumer lending product and acquire new customers.

Acceleration of decentralized finance and cryptocurrency

In conjunction with the accelerating digitization of the financial services ecosystem, numerous financial services institutions are migrating away from centralized institutions to self-executing blockchain contracts and digital assets, including bitcoin, stablecoins, and other cryptocurrencies. Fintechs are at the forefront of this surging market: Cryptocurrency/blockchain is the fastest-growing fintech sector for both early- and late-stage funding, as investors anticipate that technologies broadly enable a decentralized financial system. Banks, meanwhile, are exploring adding digital wallet-type capabilities to hold cryptocurrencies and non-fungible tokens (NFTs) for their clients. We expect to see more alliances/tie-ups between fintechs as cryptocurrency and decentralized finance capabilities evolve.

Line between fintechs and banks is blurring

A number of fintech companies have been finding ways to scale and diversify in order to compete with large legacy banks. Fintechs are acquiring banking products to sell to their clients; some are even acquiring entire banks. The line is further blurring as fintechs become regulated. Still, the costs, necessary skill sets, and regulatory complexities of obtaining a banking charter—whether by acquiring or merging with a legacy institution—can be considerable, so fintech leaders should first assess their long-term goals and select the preferred path to get there.

2022 banking and capital markets M&A trends and drivers

The following banking M&A trends and drivers are worth watching for their potential impact on headwinds or tailwinds during the coming year. Download the full outlook to explore all the important insights.

Reassessing and reinvigorating portfolios

Regularly assessing their product and capabilities portfolios should be standard operating procedure for B&CM firms as they strategise which markets and businesses they want to be in amid a shifting competitive and regulatory landscape. Two focal areas are emerging as organisations seek to differentiate their offerings and value proposition:

  • Meeting customers where they are: virtually
  • Less diversification, more specialisation
Megadeals create inventory concerns for potential merger partners

2021 was a banner year for banking megadeals of more than $500 million in enterprise value. The year’s total volume of 23 megadeals and value of $67.1 billion was the highest since 2007. Compared to other banking systems around the globe, the United States has significantly more banks, which would imply a greater need for merger activity relative to other countries. Additionally, slowed loan growth, stabilisation of bank valuations, global players retrenching capital to home markets, and technology costs for banks to modernise and digitise universally point to additional merger activity.

As fintech goes mainstream, alliances move into the spotlight

The fintech sector is among the fastest-growing worldwide, and the latest estimates suggest that it should hit almost $310 billion in value by 2022. Fintechs that want to offer end-to-end capabilities to their clients but prefer not to deal with the regulatory burden of being a bank are partnering with banks to provide digital banking solutions—primarily, white-label-type products. By partnering with fintech companies, banks can strengthen the customer experience and provide tools such as chatbots and artificial intelligence (AI) that improve the customer experience.

Evolving accounting, regulatory, and tax influences on M&A activity

A combination of increasing deal volume, delays in agency appointments and regulatory agency changes and confirmations, and mounting political pressure could trigger a further slowdown in large-bank M&A. The US federal banking agencies are in a significant state of flux, which has the potential to make 2022 a more challenging year. We advocate a position of keeping an eye on the basics—good governance, risk management, internal controls, financial strength—as table stakes to enable meeting statutory factors laid out in the regulatory process, with proactive and transparent engagement.

Keeping the banking M&A growth engine humming

B&CM M&A activity in 2021 has outstripped expectations, with volumes we haven’t seen in more than 20 years. There are numerous macroeconomic, strategic, and financial drivers to extend positive momentum into 2022 and keep the M&A growth engine humming.

Strategic buyers in 2022 may be challenged to find acquisitions that are attractive and accretive. It will be compulsory for the buyer’s management team to assess where the company is now, identify which capabilities it lacks in areas of rising demand versus peers and new entrants, and clearly articulate how M&A can enable it to compete and succeed in 2022 and beyond.

If you’d like to talk more about banking M&A activity and how your organization can succeed in 2022, let’s set up a conversation.

Look deeper

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