The financial services (FS) deals market is likely to remain muted for the remainder of 2024, marked by continued uncertainty due to macroeconomic conditions and geopolitical tensions. In this environment, especially mega deals face obstacles.
Dealmakers should remain positive about the medium-term M&A outlook because of many different factors putting pressure on FS players to accelerate their transformations to remain relevant and profitable.
Some factors are cross-sector such as digitalisation, sustainability and workforce challenges. In addition, FS has more sector specific factors such as pressure on costs and quality of assets, as well as uncertainty regarding interest rate policies by central banks worldwide.
M&A continues to be an essential part of the transformation journey, especially as organic growth faces severe challenges in the current macroeconomic environment. M&A-related transformation steps may include acquisitions to enhance capabilities and drive future growth through economies of scale and scope. Alternatively, divestitures may help to improve operations and recalibrate business models.
Smaller deals dominate
When the market does pick up, we see dealmakers favouring smaller transactions rather than mega deals to undertake transformational change. In part, this reflects the highly regulated and risk-focused nature of the sector as well as the uncertainty within the FS industry. We also expect deal processes to last longer and to be more complex as gaps between buyers and sellers on valuations have created more intense purchase negotiations.
Spotlight on India’s financial services M&A market
Prospects for M&A growth in India’s FS sector and beyond are strong. Underlying factors include the overall outperformance of the Indian economy, together with favourable demographics and rising disposable income from a growing middle class, digitalisation of services, maturing capital markets and government reforms to improve the business environment.
All dimensions of the Indian FS sector remain considerably under-penetrated, including credit, mutual funds, insurance and wealth management. This makes the FS sector an attractive destination for investors and a bright spot for M&A activity. Three main factors underline our optimism about Indian FS dealmaking in the second half of 2024 and beyond:
- Adjacent markets: Financial institutions are strategically using acquisitions in adjacent markets to strengthen their capabilities and seize cross-selling opportunities.
- Foreign investment: FS companies are exploring foreign investments to bring in cutting-edge technology, global best practices, increased product offerings and improved access to capital for the next level of growth.
- Regulation and profitability: FS companies face a pressing strategic need for consolidation and restructuring due to the evolving regulatory landscape as well as a greater focus on profitability and cost optimisation.
In addition to broader government reforms creating a more attractive investment environment, FS regulators in the country are displaying greater openness to financial sponsor investments, acknowledging the significant interest from both global and Indian sponsors in the sector. Private equity (PE) is expected to play a vital role in driving deals within the FS sector. The trend of financial sponsors acquiring controlling stakes and actively managing companies is gaining momentum and is expected to accelerate. One example of such PE activity is the recently completed $1bn acquisition of HDFC Credila, an education finance-focused non-banking financial company (NBFC), by a consortium of PE firms.
In the credit sector, there is a significant opportunity for expansion of debt relative to the size of India’s economy. Demand for both enterprise and retail credit is surpassing current offerings from banks and NBFCs. Private non-bank credit is well-placed to address these gaps. Key trends include banks collaborating with fintechs and adopting co-lending models to broaden their customer base. Additionally, the impact of COVID-19 and stricter regulations has led to a trend of consolidation among troubled and mid-sized NBFCs. Moreover, foreign players are exploring entry into Indian financial markets via the NBFC route, with ambitions to evolve into universal banks.
In the insurance sector, global insurers are entering into joint ventures with Indian companies to expand their operations or enhance their distribution capabilities. In February 2024, Zurich Insurance Group announced the largest investment by a global insurer in a non-life insurer in the Indian market with its proposed $670m acquisition of a 70% stake in Kotak Mahindra Bank’s general insurance arm.
In the asset and wealth management sector, new entrants and established players are both driving robust M&A activity with the aim of broadening market share and enhancing capabilities. Major domestic banking groups are strengthening their asset management divisions, recognising the importance of distribution capabilities for growth beyond major cities. An example is the joint venture between Invesco’s domestic asset management business, Invesco Asset Management India, and Hinduja Group’s IndusInd International Holdings, the promoter entity of IndusInd Bank (India’s fifth-largest private-sector bank).
Key M&A themes for financial services in 2024
- Restructuring: FS market participants are seeing signs of a growing deterioration in credit quality. At the beginning of the year, they expected to see restructuring measures, such as divestments of non-core assets or non-performing loans (NPLs) to strengthen balance sheets and improve capital ratios in the banking sector. However, asset appraisals are rather stable and banks are better capitalised than in previous years, which in our view is currently limiting the need for deals as a potential solution for NPL portfolios.
- Environmental, social and governance (ESG): Investors are focusing more on ESG criteria when considering investment decisions and determining business strategies. Recent geopolitical tensions have refocused attention from asset managers and insurers on the ESG risks in their private investment portfolios, where there has been less transparency. This will likely lead some to exit certain investments and to revisit their investment strategies and the data they use to evaluate risks.
- Digital transformation and technology: Digitalisation and artificial intelligence (AI) remain strategic priorities as FS players need to address consumer expectations and build market position against the backdrop of disruption from fintechs and non-FS companies. We expect that transaction activity in the second half of 2024 will focus on deals (both traditional M&A and strategic partnerships and alliances) to leverage data, implement solutions to rising cybersecurity concerns, drive operational efficiencies, and speed up transaction processes.
- Private equity: Investors with increasing specialisation in FS, dedicated FS teams and increasing fund volumes are focusing on FS and FS-related topics, such as insurance brokerage, platforms, fintech, insurtech and regtech. Hence, we expect to see further M&A activity in these areas. However, with PE investors facing pressure on returns due to the higher cost of capital and limitations regarding leverage, a focus on value creation will be more important than ever.
Global M&A trends in financial services
M&A outlook for financial services in the second half of 2024
Despite a challenging market environment and slower than normal deal activity throughout the FS sector in the first half year 2024, we see potential for an uptick in M&A with an improved deal flow in the next six to 12 months. FS players remain under significant pressure to further transform their business models to meet current and future challenges and create sustained outcomes. M&A can serve as a catalyst for required transformational steps, either by acquiring businesses to drive future growth or by divesting less profitable or non-core businesses to sharpen an organisation’s operational focus.
