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What four themes will drive Financial Services (FS) M&A activity in 2023?

FS M&A market outlook - Q1 2023

Over the last year, Financial Services have accounted for around 17% (by volume) of all global and European M&A transactions. Looking ahead to Q1 for 2023, we see four main themes which will drive the outlook for FS.

1. Interest rates


The outlook for interest rates has changed markedly since the beginning of the year in the face of rising inflation across the globe, with central banks in many leading economies having increased rates on successive occasions.

In recent weeks, market expectations have remained volatile. At time of writing, Refinitiv data suggests the market is expecting the Bank of England will raise interest rates to 4.6%, the US Federal Reserve to 5.0% and the ECB to 2.8% during 2023. Considering rates were at 0.25%, or lower, across all three economies only a year ago, this higher rate environment will impact the M&A landscape.

The effects are three-fold.

Rising interest costs will continue to impact near-term valuation expectations, volumes and debt markets for specific sectors .

The rise in discount rates means there will be a return to focus on bottom-line profitability as well as top-line growth.

Increasing interest rates are also likely to result in greater funding cost and leverage disparity within a financial sector that had grown accustomed to lower-for-longer interest rates. This should mean a greater focus on relative balance sheet strength and potential financing structures in an M&A context, which may change the buyer universe and appetite for a particular asset.

2. Economic slowdown

We're all aware of the recent deterioration of the economy: caused by higher inflation, higher energy costs and a drop in consumer confidence – which led to the Bank of England forecasting a recession in Q422.

A slowdown like this creates both challenges and opportunities.


Growth will be slower, and the pressure on costs will rise, which may impact some business outlooks. A slowing in growth may also manifest itself in falling asset valuations, a rise in unemployment and defaults.


That said, conditions are very different compared to the global financial crisis. Today’s banking sector has more capital and liquidity (having spent the post-crisis years improving balance sheet strength), and there remains a clear willingness to lend to the 'real’ economy, even after the disruption of the past few months. Most banks are expecting the slowdown to impact on the quantum and pace of capital returns to shareholders, as opposed to raising fresh capital from shareholders.

The slowdown may create challenges, but M&A in financial services will continue to feature as a solution for businesses. Consolidation may provide an opportunity to grow bottom line profitability through synergies in the context of lower growth and pressure on profitability.

3. Capabilities remain the focus

The desire to acquire new or improved capabilities, products and additional clients across key areas will continue to dominate.

Particularly across three key areas.

Partnerships: We expect a continued appetite to create new partnerships and alliances to broaden offerings and access new clients.

Digital transformation and technology: to improve customer experience, create, and maintain competitive advantage, and deliver scalable and cost-efficient platforms for growth.

Market adjacencies: where businesses explore adjacent sectors or markets outside their traditional product bases in order to drive greater growth – like banks looking into wealth platforms.

4. Financial services remains attractive

Whilst recessionary risks raise concerns of slowing growth and a rising default cycle, we should not ignore that current economic conditions make certain subsectors of financial services more attractive on a relative basis, for example as an inflation-hedge or as benefiters of rising interest rates.

Meanwhile large FS strategics are generally entering this crisis from a position of balance sheet strength, and in the private equity space there continues to be a significant volume of capital which has been raised but not yet deployed. We expect that FS sector M&A will continue to benefit from both as a target for deployment.


What will happen next year?

Overall, although the economic outlook appears more challenging, and conditions have been more volatile in recent months, we will continue to see strong drivers, appetite, and strategic rationale for M&A in the financial services sector next year.

It won't be without its challenges, but material shifts in the macro environment could provide both the catalyst and opportunity for M&A transactions.

If you would like to discuss your organisation’s 2023 M&A agenda, please get in touch.

You can also explore our other M&A market outlooks for 2023.

Data source: Refinitiv Eikon

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