2020 Banking and Capital Markets M&A Outlook

Banks, investment firms, and fintechs build upon strengths

Building economic and political uncertainty in 2020 is likely to create a backdrop of short-term headwinds for banking and capital markets (B&CM) mergers and acquisitions (M&A). However, dropping interest rates, ongoing tariffs and trade disputes, rumblings about an economic slowdown, and the upcoming US presidential election are stirring up uncertainty that may temper M&A, especially in the second half of the year.

Building blocks for dealmaking remain intact: A pro-business regulatory environment, lingering tax-reform benefits, a low cost of funds; the desire for scale efficiency, and the need to bolster digital capabilities. We expect banking and capital markets M&A to be similar to 2019, with bookended deal volume. Deal types are likely to include ongoing consolidation, a few mergers of equals (MOEs), serial acquirers saturating their footprint or technology capabilities set, and the maturation of fintech players.

As banks, investment and wealth management firms, and fintech companies look for partnering opportunities, they are likely to counter certainty with caution. Timing is important: If a buyer is going to make a move, they may do so earlier in the year or wait until the economic and political dust settles.

Download the 2020 outlook to review 2019 banking and investment firm M&A activity, explore expectations for the year ahead, and identify trends that organizations need to keep an eye on. Visit the banking and capital markets page for broader industry insights, analysis, and resources.

Trends and drivers of 2020 M&A activity

Keep an eye on the following trends and drivers for their potential catalyzing or hindering effect on industry M&A during the coming year.

Transform while you transact. Reaping the full benefits of an M&A transaction can be a long and costly journey, especially when technology is a key value driver. Banks often have bloated infrastructure and legacy systems unable to keep pace with evolving customer demands. Investment management firms generally lag in digital maturity. Many organizations also face the daunting prospect of transforming their platforms, processes, and products to attain post-M&A integration goals.

Functional integration at multiple levels creates competitive advantage at scale, as well as sizable economic benefits. Traditionally, companies engaging in M&A have focused first on integration—then, in some cases, on transformation. Today, many CIOs and other executives are increasingly taking a different approach. They are opting instead to “transform while they transact” and work toward both goals concurrently.

By establishing a vision for the desired post-M&A end state—as well as the infrastructures required to support it—early in the process, the newly combined companies can more quickly align their business models and information technology (IT) architectures with overall strategy, realize synergies more rapidly, and reduce one-time integration costs.

Accounting, regulatory, and tax influences on M&A activity. In 2019, the financial services industry enjoyed the benefits of operating in a pro-business regulatory and tax environment. Conditions favorable to M&A should extend into 2020; however, the landscape may be tinged with uncertainty linked to the upcoming US presidential election and a possible political regime change. Financial firms engaged in dealmaking should continue to focus their diligence efforts on the core basics of asset quality, BSA/AML/KYC compliance, internal controls, governance, and risk management protection. They should also pay increased attention to operational resiliency: IT failures across financial institutions have focused regulatory and supervisory attention on the risks that technology change can pose to the financial services sector.

Finally, they should consider the potential implementations of several recent regulatory and tax policy developments. Find more details in the 2020 Banking and Capital Markets M&A Outlook.

Find the right partner(s) to weather a potential storm. With continuing political and economic uncertainty increasing the prospect of a 2020 downturn, banks and IM firms should consider acquisitions, investments, and partnering arrangements with organizations that have offsetting capabilities (such as, fund certainty or digital prowess) to their strengths and weaknesses. Potential benefits of combining forces rather than going it alone in today’s unsettled marketplace include:

• Improve efficiency ratios and take costs out on a go-forward basis.
• Manage technology evolution over larger-scale operations.
• Mitigate treasury inefficiencies through improved asset and liability matching.
• Distribute one partner’s great product or cross-sell both partners’ similar products across a larger platform.
• Reduce or eliminate location overlap.Leverage in-house financial, operational, and technology expertise of both parties.

M&A banking activity will proceed, but with caution

Escalating uncertainty won’t bring banking and capital markets M&A to a standstill in 2020. There are substantial reasons for organizations of all sizes to seek partnering opportunities. We are optimistic that dealmaking will remain active, at least in the first half of the year. Regulatory and tax conditions remain favorable, consolidation continues among small- and medium-sized institutions, and companies with strong balance sheets have more money to spend on investments and acquisitions.

Organizations contemplating M&A should continue moving forward, but they should also exercise caution. Carefully align corporate and M&A strategies, conduct thorough due diligence, look for a solid mix of cost-takeout and revenue-generating opportunities, and make sure the resulting footprint and/or capability overlap isn’t too extensive. Plan integration steps early to fully realize post-transaction financial and operational synergies.

While M&A always comes with risk, especially in a changing landscape, the greater risk may be failing to partner to navigate uncertainty and add financial strength and operational resiliency.

To learn more, download the 2020 Banking and Capital Markets M&A Outlook report.

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