2024 banking and capital markets M&A outlook: The next chess move

2024 banking and capital markets M&A midyear outlook

2023 set a low bar for bank mergers and acquisitions (M&A), but a promising start to 2024 may be a cause for optimism in the near- to medium-term. Opportunistic bank valuations (especially among mid-sized regional banks, $50-$100 billion in assets), market conditions, and increasing regulatory expectations appear to be driving consolidation as expected. However, uncertainty remains (interest rates, the regulatory approval process, an upcoming presidential election, etc.), creating some headwinds for bank M&A. Overall, it appears that the pendulum has come back to center from the 2023 lows and, as uncertainty subsides, the stage appears set for more bank deals in the remainder of 2024 and into 2025.

Banking M&A

Soaring inflation prompted the Federal Reserve to implement the most significant interest rate hike in decades, with its benchmark federal funds rate hitting a 22-year high in the summer of 2023. That benefited US banks by boosting their return on equity and profitability, but it also made deals more expensive and hurt legacy fixed rate loans and investments. At the same time, the industry dealt with the fallout from a string of bank failures and distressed takeovers in the spring. And behind the headlines, the potential for net interest margin erosion lurked as market watchers forecast an economic slowdown. 

The topline result for banking M&A is that both the number of deals and average deal value were the lowest in the seven years we tracked. 

We expect 2024 to bring a myriad of different economic factors that will influence the banking M&A outlook. Following the 2023 banking turmoil, banks are increasingly turning to higher-cost funding sources to protect against deposit outflows, leading to compressed margins and increased market volatility. 

At the same time, however, deal activities face several notable headwinds. If credit card and auto loan balances remain high into 2024, banks may see more consumer credit distress paired with higher delinquency and loss rates. These factors may have an impact on profitability, reserve rates, and perhaps available capital and appetite for buyers, especially in specialty credit subsectors. 

Additionally, on July 27, 2023, banking regulators released proposed rules for the finalization of US Basel III reforms. As a result, capital requirements are expected to significantly increase. 

In 2021 President Biden issued an executive order that encouraged the US Department of Justice (DOJ) and federal banking agencies—which have independent review authority—to update their oversight of bank mergers. In December 2023, the DOJ and Federal Trade Commission (FTC) jointly released new merger guidelines, which replaced prior 2010 horizontal merger guidelines and 2020 vertical merger guidelines. Taken together, these actions indicate that mergers will likely continue to face increased scrutiny. While the market waits for finalized, banking-specific merger guidance, potential acquirers will have to navigate a relatively uncertain and rigorous review process for any potential banking M&A.

Investment management and wealth management

Growth in the investment and wealth management sector hit a speed bump last year. For the first time in nearly 50 years, broad market indices for both equities and bonds were down at the same time. As a result, many sector participants operated through 2023 with uncertainty and volatility in mind, which was reflected in the overall number of deals, which were the lowest since 2020. Deal volume for investment banks, brokers, and capital markets also fell to a seven-year low.

As we move further into 2024, we’re expecting slower growth will likely create revenue challenges for asset managers. In turn, many managers will likely continue to offer fee discounts and position to be a strategic partner to large asset owners. As managers continue to seek growth pockets in the global industry, there could be an increased number of cross-border deals to drive scale in specific asset classes or gain access to new investor types. 

Investment management M&A activity is likely to increase this year, as organizations look to build scaled platforms with in-demand asset class capabilities like private credit, real estate, and infrastructure. Additionally, the average size of deals may increase in 2024 as well. 

On the other hand, this year is predicted to see a slight slowdown in rollups, and independent broker-dealers and registered investment advisers will likely continue to centralize their portfolio and investment decision-making in order to lighten their compliance, regulatory, technology, and infrastructure burdens.

Fintech, payments, and exchanges

In 2023, many fintech companies struggled to raise the same amount of funding raised in prior years. Most fintech companies that are susceptible to consumer spend took a dramatic hit in their valuations. At the same time, buyers were keen to acquire companies that can show consistent revenue growth and a quick ramp to profitability. 

Less competition from private equity buyers mean that strategic buyers had more opportunity to conduct comprehensive due diligence before deciding whether it was better to buy a solution or build their own. As with investment management and wealth management, private equity investors held their fire in fintech M&A last year. 

In 2024, we expect strategic buyers to continue their trend of smaller-dollar, bolt-on acquisitions to complement their existing portfolio of products and geographies. We also will likely continue to see venture arms of strategic buyers take minority stakes in fintech businesses as they try to determine potential winners in the sector. 

Additionally, expect the strong M&A trend for B2B payments to extend into 2024, particularly when considering the possibilities for app integration, new capabilities, and automation of accounts. For the insurance tech (InsurTech) world, legacy insurance carriers are expected to continue looking for ways to digitize, embed offerings to end customers, and otherwise achieve cost efficiencies in an industry that has generally lagged from a technology standpoint.

The path forward

Investment and wealth managers face ongoing secular headwinds that may send them in different directions in the search for scale. When anticipating the future, though, it’s all in the details. Banks must navigate mixed economic factors, increased merger scrutiny, and the potential for consumer credit distress. Above all, keep your capital and playbooks ready, because volatility can sometimes be a friend. If you can react with agility to an unexpected opportunity, the market may very well reward you for it.

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