The Australian M&A Outlook 2023: Financial Services Industry Insights

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The ‘fear of missing out’ (FOMO) that dominated financial services (FS) M&A in FY21-22 has dissipated, and dealmakers are now prepared to pass on a deal, confident that something else will come along – and possibly at a better price. This caution has only been exacerbated by recent developments in the US and European banking markets, and the potential for flow-on / contagion effects.

What does this mean for dealmakers? While it’s no longer a seller’s market, dealmakers shouldn’t be complacent as opportunistic deals will present themselves, and the right assets will be hotly contested.

Overview: Deals activity reverts to pre-pandemic levels

Completed deal activity slowed in 2022 (particularly in 2H2022). Volumes were down 33% (from 368 deals in 2021 to 246 deals in 2022). The fall in total deal value was even more dramatic (down 72%, from US$65b in 2021 to US$18b in 2022), thanks to some supersized deals in 2021.

But 2021 was the best year on record for global M&A, so volumes are only falling back to (strong) pre-pandemic levels. For instance, FS M&A activity averaged 270 deals (US$18bn) per year in Australia between 2018-20.

There was a healthy number of processes run during 2022, however, successful outcomes were increasingly difficult to achieve, with some processes not reaching an outcome. Caution began to override optimism as headwinds (such as rising interest rates, inflation, anticipated deterioration in credit performance, and geopolitical instability) increased uncertainty.

CEOs’ appetite for growth, and their continued focus on transformation, will drive businesses to pursue M&A in 2023.

M&A Outlook for 2023: The trends you need to know

Despite the reversion to a more normal level of deal activity in 2022, we expect that CEOs’ appetite for growth, and their continued focus on transformation, will drive businesses to pursue M&A in 2023. In fact, our most recent CEO Survey found 40% of global CEOs think their organisation will no longer be economically viable in ten years’ time, making transformation top of the agenda.

What else is dominating agendas? We’ve identified five overarching trends for financial services M&A this year:

CEOs will continue to focus on acquiring capabilities that support transformation. (Think: access to new customers, and/or the ability to enhance existing customer experiences or improve productivity).
Appetite for growth and scale will ensure sizeable M&A opportunities are hotly contested (although, perhaps less prevalent).
Subdued economic conditions will put strain on certain challenger business models, particularly those with less access to capital, leading to some distressed activity.
Private Equity (PE) will continue to be a source of activity, both as potential buyers (particularly in capital-lite businesses), as well as sellers.
Depressed share market valuations will continue to drive public market activity.

Expect M&A opportunities across most subsectors in 2023

Here, we highlight the sub-sectors to watch:

Wealth and funds management

Sustained growth of industry superannuation funds (including fund mergers), coupled with the continued rise of passive investment products, has put pressure on traditional fund managers for several years (through fee compression as well as loss of funds under management). Expect M&A activity amongst fund managers to accelerate in 2023, as volatile markets force these businesses to acquire scale and synergies to build more financially resilient businesses.

In addition to scale-driven deals, we also expect a continuation of capability-driven deals, as fund managers look to expand their alternative asset class strategies to attract and retain investors. Funds that have capabilities in alternative assets (such as real assets, private credit, and ESG) will remain attractive targets for local and inbound managers.

In the financial advice space, regulatory reform continues to be debated following the release of Michelle Levy’s Quality of Advice Review. Expect limited M&A activity in the mass affluent segment of the market, however, appetite for high-net-worth wealth managers appears to be strong.

Banks

With divestment programs largely complete across the majors and despite some notable instances of distress in the broader international banking landscape, we expect the banks to be primarily focused on deal activity that supports capability needs within their portfolios of businesses. For some time now, the banks have focused on building out customer ecosystems with either alliances, partnerships or acquisitions that help to embed the bank in the customer lifecycle.

More opportunistic scale-driven banking transactions are also not out of the question. For instance, when ANZ’s acquisition of Suncorp Bank was announced, speculation quickly shifted to a possible tie-up between other regional banks.

Non-bank lenders

Previously, we talked about the proliferation of non-bank lenders leading to a possible flurry of deal activity, particularly in commercial/SME finance. All of this activity hasn’t yet transpired.

Near-term activity across all non-bank segments (commercial, mortgage, and personal) faces two key challenges: i) the impact of rising interest rates, and ii) the anticipated deterioration of credit performance.

Some lenders are ripe for a liquidity event. However, potential buyers are unlikely to have enough conviction to transact until monetary policy stabilises and the impacts of recent tightening are better understood. Notwithstanding this, in-market players with an eye on exit will continue to look for growth, which may drive book acquisitions.

Insurance

The major insurers (both general and life) appear focused on internal transformation. As such, we suspect proactive M&A activity to be a lower priority.

Just as with banking, however, there’s the potential for opportunistic acquisitions, particularly if sub-scale insurance businesses (foreign-owned or local niche players) decide to change their strategic focus or portfolio mix. While incumbents might not proactively seek out these opportunities, any processes are likely to be highly competitive given market constraints on growth.

More broadly across the insurance value chain, we expect to see continued activity among distribution/broker businesses following Steadfast’s acquisition of Insurance Brands last year.

Fintech

Across the fintech (challenger) space, we’ve seen management teams step back from a ‘growth at all costs’ mindset, and shift to capital preservation, in response to increased interest costs and a less friendly fundraising environment. While those that are profit/capital generating may be able to batten down the hatches, a number will need to raise new capital to survive, presenting opportunities for both sponsors and corporates.

Dealmakers shouldn’t be complacent as opportunistic deals will present themselves, and the right assets will be hotly contested.

What’s next for dealmakers?

Dial up due diligence

The next six months will test business models and underlying credit performance more than ever before, ensuring the ascension of buyers relative to sellers. Also, it will give rise to a range of investment opportunities from transformational deals to smaller tuck-in acquisitions.

Dealmakers should not be complacent, though. In fact, given the current economic backdrop, they need to be more diligent than ever when assessing opportunities as boards and investment committees will be scrutinising deals with a heightened level of caution.

We’re already seeing the breadth of due diligence expanding rather than shrinking.

Finally, given the extent of private capital waiting to be deployed, financial institutions need to be cognisant of competing with PE buyers (and their partners) for targets, and vice versa. This means developing a better understanding of how each side will assess value and risk, plus properly assessing and quantifying value creation opportunities.