Financial Services

The global outlook for the Financial Services sector is positive and all-encompassing. The Financial Services industry growth has experienced an acceleration due to the recent increase in the implementation of digital technology within small businesses, large companies, nonprofits, and government entities. As the COVID-19 crisis continues to draw toward its end, post-crisis regulatory frameworks will continue to settle into place, with financial institutions subsequently altering their business models. This industry is a primary driver of a nation’s economy and makes up one of the global economy’s most valuable and leading drivers of general economic activity.

The Financial Services industry has experienced a recent surge in cross-sector Mergers & Acquisitions (M&A). In a robust state, the Financial Services industry has proven to be a major contributor to exponential economic growth and activity. The shift towards alternative providers and platforms, regulatory measures, digitalization, low interest rates, and an increasing economic impact from COVID-19 will lead to elevated amounts of M&A activity in the Financial Services industry throughout the projection period to 2025. Exhibit 1 shows the performance of the Financial Services sector since 2016 relative to the overall economy, comparing sector revenue change to GDP growth from 2016-3Q2020.

Financial Services revenue totaled $170 billion in 2019. While average annual growth totaled 4.1% from 2013-2018, the industry is expected to grow at an annualized rate of 4.7%-6.0% from 2019-2024. Industry growth is expected to continue as companies rearrange operations and recover from the COVID-19 impact. The pandemic led to restrictive containment measures including social distancing, remote working, and the closure of commercial activities, resulting in operational uncertainty moving forward. Prior to COVID-19, M&A activity within the financial services industry was notably strong in banks, investment companies, real estate firms, and insurance companies. Due to these catalysts and an increase in the overall efficiency of Fintech, M&A and general investing activity alike are also expected to rise through the five years to 2026. Exhibit 2 shows the trends in investing activity from 2015-2020.

Structural profitability pressure will drive consolidation of a highly fragmented Financial Services industry. Companies including JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup will continue to seek high yields in a challenging low interest rate environment, focusing on M&A opportunities to achieve scale and further develop their business models. Given the advancement of Fintech establishments in recent years, companies will continue to attract investors to either support the digitalization as part of a business model transformation or act as a portfolio company for corporate venture capital funds.

As of the end of FY2020, Financial Services M&A deals worth $94 billion had been announced globally, which include Aon and Willis Tower Watson, Nexi and Nets, Morgan Stanley & Eaton Vance, Huntington Bancshares and TCF Financial, and M&T Bank & People’s United Financial. Aon acquired Willis Tower Watson for $30 billion as part of an all-stock deal to make it the world’s most elite insurance brokerage. Nexi’s acquisition of Nets for $9.2 billion was part of their strategic push to become Europe’s payment powerhouse. Morgan Stanley’s acquisition of Eaton Vance for $7 billion was part of their push towards expanding its investment management business and adding more offerings to retail investors. Similarly, Huntington acquired TCF Financial for $6 billion to scale its resources and drive increased long-term shareholder value. M&T Bank Corporation added a promising bank holding company in People’s United Financial to provide additional growth opportunities. In sum, the overall outlook for M&A in the Financial Services industry appears to be positive due to the outlook considering the economic budget, monetary policies, and successful COVID-19 vaccine deployment.

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