Financial Services (FS): A Q2 M&A Outlook

There are many challenges facing FS. But could there be opportunities to boost M&A deal activity? Find out in our FS M&A market outlook for Q2 2023.

Let's start with The Bank of England (BoE). Its base rate is still high – when you compare it against the past decade – and as the BoE continues to raise rates, there are signs that these have now levelled out.

Throughout H222 and into Q123, we saw – and continue to see - many well-trailed/expected sales processes delayed. Significantly, yet unsurprisingly, global FS M&A deal volumes dropped by 33% in Q1 this year compared to Q1 last year. And as the M&A slowdown continues into FY23, we expect the cost and availability of debt financing stay tight. This means that the value expectation gap between buyer and seller will continue to widen.

But what does this mean for debt funding? The question everyone's naturally asking themselves is if they'll return to 2021 valuations and deal flow or if current valuations represent a new normal.

Across Financial Services, we are now starting to see high-profile and sought-after assets, particularly for distribution and wealth management businesses, coming to market after the deferral of several processes over the past 6 months.

Following a general market trend in suppressed asset values, we are also experiencing an increase in investor interest in P2P transactions, recognising the potential upside which could be unlocked from current listed company valuations.

Large banks (particularly in the US) are thriving in the current interest rate environment. They've accessed cheap and sticky liquidity, have robust business models, risk controls and management teams proven through the cycle. However, the collapse of Silicon Valley Bank (SVB) has highlighted that smaller banks can be exposed to a loss of depositor confidence leading to liquidity issues and we note that many smaller banks trade well below book value.

We expect to see an increase in Financial Services M&A activity towards the end of FY23 and into FY24 for the following three reasons:

1. There’s a backlog of assets and processes – some that have been delayed by over 12 months - which need to come to market, especially for Private Equity where such assets are held by older funds. However, bid / offer spreads will need to narrow from current levels to enable this.
2. Private equity has continued to raise new funds, and corporate balance sheets are strong, which means there is significant market capital to deploy.
3. As inflation and interest rates come under control with a resulting return of investor confidence and stability returns to banking markets, the focus can turn to long term planning and M&A as a way of addressing strategic issues in the sector such as market access, economies of scale and technology debt.

Please contact a member of our team if you would like to discuss your organisation's 2023 M&A agenda.