Financial services sector M&A volume decreased by 6 percent to 461 deals in 2018, with value decreasing 48 percent to US$80.2 billion. But there are signs that the sector’s M&A market is moving in the right direction going into 2019.

Congress and the Federal Reserve have moved to ease some of the tough regulation imposed on financial institutions following the financial crisis, and after years spent retrenching to domestic markets and rebuilding balance sheets, banks and insurers are moving back into the black. According to the Federal Deposit Insurance Corp (FDIC), Q3 US bank net income climbed to US$62 billion, a 29.3 percent increase compared to the same period last year.

48%
Percentage decrease in financial services M&A value compared to 2017

As part of the regulatory rollback, the definition for what constitutes a systemically important financial institution (SIFI) was changed from institutions with at least US$50 billion in assets to those with at least US$250 billion. The raising of this threshold eased a major deterrent to banking M&A, especially for mid-size US banks, which, under the previous regulatory regime, had been wary of becoming subject to much more onerous requirements with respect to capital and liquidity.

Back to growth

As lenders have returned to profitability and regulation has rolled back, banks have shifted their focus to growth. Fifth Third Bancorp’s acquisition of Chicago-based MB Financial for US$4.6 billion is its largest deal since 2001 and third-largest ever. The MB Financial deal will increase the bank’s presence in one of its core growth markets. Meanwhile, at the end of January this year, two Midwest banks, Chemical FInancial and TCF Financial, joined forces in a deal worth US$3.6 billion. The merger will create one of the biggest banks in the MIdwest region.

In the insurance sector, institutions have also turned to M&A to drive growth. Lincoln National’s purchase of rival insurer Liberty Life Assurance Company of Boston for US$3.3 billion has positioned it as the US’s largest provider in fully insured disability sales with a group benefits business serving some ten million customers.

Further opportunities in fintech

In addition to a rise in M&A involving traditional financial institutions, deal activity in financial services has also been lifted by the emergence of the fintech industry. Concerns around how fintechs will be regulated has given some banks pause when considering fintech deals, but with the likes of Goldman Sachs acquiring personal finance startups like Final and Clarity Money, US financial institutions have accepted that they need to serve the digital needs of customers with new platforms and modern services.

According to CB Insights, 40 of the 50 largest banks in the US made no fintech investments in the five-year period from 2013 to the beginning of 2018. The ten banks that had invested in fintech had made only 18 such deals between them, but five of these deals came in 2017 alone, suggesting that higher volumes of fintech deals could be on the way as banks move to upgrade their platforms.

Fintech allows financial institutions to reduce their costs as well as gain more of their customers’ wallet shares. In addition to helping financial services companies open new distribution channels, fintech can also help back-office functions, such as reducing the risk of identity fraud.   

[View source.]