The Australian M&A Outlook: Financial Services Industry Insights

Market outlook for 2022

When we ‘zoom in’ on sub-sectors of financial services, several specific areas of opportunity are visible.

Mandatory superannuation sets Australia apart from many overseas markets, which is guaranteed to attract interest among acquirers from other jurisdictions. For the past few years, Australia's superannuation industry has caught investor attention in all parts of the wealth value chain – including superannuation funds themselves, investment/wrap platforms, fund managers, and service providers to the industry. 

With ANZ, CBA and NAB having already done deals for their wealth businesses, Westpac's sale processes for Panorama and the BT Super business will be the key deals to watch this year. 

There has also been a steady stream of activity with alternative asset managers. This is set to continue, driven by managers wanting to build capability to attract the growing capital pools seeking access to alternative asset classes (real assets, infrastructure, ESG, etc.). 

In the wake of recent mega-mergers (e.g. SunSuper and QSuper), we expect to see industry super funds continue their consolidation journey. Heightened regulatory monitoring (e.g. product heatmaps, annual performance tests) also continues to put pressure on funds which are underperforming or have other sustainability challenges to find long-term solutions for their members, rather than 'merger of equals' transactions which may not achieve sufficient scale.

Several BNPL players now operate (and are listed) in the Australian market, but few have sufficient scale to turn a profit (many are still capital hungry as a result, as they continue to invest to reach profit maturity). The likely consequence of that will be market consolidation. 

Block’s acquisition of Afterpay was one of the mega deals of 2021 and this understandably dominated the business pages. Since then, Latitude has announced a bid for Humm’s consumer/BNPL business, and Zip has announced a bid for Sezzle. 

In the past 12 months, share prices of listed players have declined substantially (even relative to the broader tech sector) – a result of slowing growth, increasing competition, the perpetual threat of regulatory change, and the prospect of rising interest rates (which will not only increase funding costs, but also heighten customer credit risk). These depressed share prices make it harder for boards to justify raising capital (given the dilutionary impacts), adding momentum for strategic mergers that will improve scale (across geographies and market segments) which in turn enhances participants’ ability to attract further capital to survive and thrive.

Whilst the major banks have recently been doubling down on their corporate / business banking businesses, various non-bank challengers have found opportunities to carve out market share through targeted plays, be they technology or relationship led. With a number of commercial finance businesses now under private equity ownership, we expect the proliferation of non-bank challengers (coupled with some potentially orphaned/non-core businesses) to prompt a flurry of M&A activity in the SME lending space.  

The fleet leasing sector also continues to be ripe for M&A, particularly after SG Fleet's acquisition of LeasePlan last year (that deal gave SG Fleet diversity in its business model and improved its scale). Many thought this would spark a raft of deals involving other major players, but pandemic-related supply chain issues (which have benefited residual value performance) seem to have temporarily delayed further merger activity. We expect mergers to be back on boards’ agendas in 2022 to shore up scale and longer term-performance.

Insurance dealmaking is accelerating globally and Australia is no exception. There was a flurry of activity last year with the sale of CBA's general insurance business to Hollard, the sale of Westpac's general insurance business to Allianz, and the speculated sale of another general insurance business. This activity was preceded by the major banks' exit from life insurance, the last of which was Westpac's transaction with TAL. 

Where to next? Over the past two years, private equity has invested in insurance distribution and with existing listed players also hungry for growth (e.g. Steadfast's acquisition of Coverforce), we expect no shortage of consolidation and bolt-on activity in 2022.

After a number of years focusing on simplification and reducing internal complexity, the big 4 banks are under pressure for growth, particularly as their traditional businesses continue to be highly contested, not only by their big 4 peers, but by a growing plethora of challengers. With their extensive divestment programs now largely complete, the big 4 banks have started to actively assess and pursue M&A opportunities to accelerate growth and capabilities - growth focused on market share, revenue diversity and new market segments, and capability focused on technology and digital competence (including people).

In line with what we’re seeing overseas, we expect to see deals across the full spectrum this year; from smaller tech/digital capability and product specific deals to larger, more opportunistic core banking deals, where sellers decide that a segment of their portfolio or their Australian operations are non-core.