What we expect to see in 2023
Expand all
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The retail banking outlook remains positive despite inflation and deteriorating economic conditions overall. Propped up by government grants and loans during the pandemic, individuals largely are continuing to make timely mortgage and credit card payments.
Commercial banks face a much tougher situation. Where recessions typically are consumer-led, the current economic slump has been largely commercial-led, in part due to substantial losses on commercial real estate holdings. Banks hold most commercial real estate debt, and a shakeout likely is coming among less desirable properties, which will be harder to sell or lease as workers continue to embrace working from home. Because corporations are more exposed to rising interest rates than are retail customers, commercial banks may find themselves challenged to sell profitable products and services this year.
Investment banking pressures differ considerably. Credit Suisse Group AG and other European banks have said they intend to spin off their investment banking arms, and we expect some US banks to follow suit. The result may be a return to stand-alone investment banks, as was the case prior to widespread acquisitions a decade ago.
Given ongoing economic uncertainty, we expect pure bank deal volume to be similar to 2022’s level. There could be few or no megadeals, though more mergers of equals—or distressed sales billed as equal mergers—could become more common. The current lending capacity-constrained environment may extend for one to two years, and earnings may be depressed for one to two years as the specter of recession looms. Banks accordingly will need increased capital leverage, strategic planning, and patience to complete deals.
Well-capitalized institutions are likely to have ample financial and strategic acquisition opportunities in 2023, particularly if economic conditions deteriorate further. Banks facing margin erosion may opt to sell portfolios, operations, or entire businesses.
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Wealth management
Most WM firms were able to retain healthy margins—if thinner than in 2021—despite interest rate hikes and falling asset values. WM remains immensely attractive for its fee-based income, high margins, and access to investors. Many wealthy individuals do their personal and business banking at the same institutions, enabling banks that establish strong personal ties to pull in lucrative WM business and vice versa.
We expect M&A to continue to thrive given WM’s dynamics, including a large number of independent firms and sellers looking for succession or exit in consolidating markets. Activity may blossom as entities heavily dependent on assets under management for revenue—and hence impacted by shrinking asset values—are more likely to be sellers.
Investment management
We forecast little M&A acceleration until economic and market dynamics become clearer in or beyond the second half of 2023. With IM growth slowing relative to historic norms, firms probably will focus on obtaining a greater share of asset from existing clients by adding products such as real estate and liquid alternatives.
Despite those concerns, IM is still a growth industry. Acquirers with access to capital likely will eye differentiated IM firms with in-demand capabilities. The choice for IMs will be whether to buy companies with covetable expertise and client lists, or to expend the sums and time required to grow capabilities internally. Approaches undoubtedly will depend on firms’ individual situations.
There are likely to be opportunistic deals for expertise or valuable clients, along with growth in new specialties. There’s also deep interest in capitalizing on vast IM data resources for operating efficiencies, distribution alternatives, and investment insights. The most successful deals will likely be made by firms and buyers that are thoughtful and deliberate on the process, as well as clear and intentional on benefits to clients, not just to buyer and seller.
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Fintech
We believe a sizable fintech shakeout will occur over the next few years, with survivors being bought out at highly discounted prices from those of a year or two ago. The embedded finance and digital payments subsectors will be winners, while blockchain, crypto, and non-fungible tokens (NFTs)—the unique digital identifiers recorded in a blockchain that grant no actual rights to physical and electronic images or text—are likely to struggle, at least in the near term. Consistent with 2022, most fintech deals are likely to be tuck-in” acquisitions for banks, rather than purchases by other fintechs or by PEs sidelined by interest rates.
Regulatory considerations
Major regulatory developments that will likely impact M&A activity in 2023 include:
- Bank merger policy review: Banking regulators will continue to evaluate their approach to reviewing banks’ proposed acquisitions of depository institutions. Launched in mid-2021, the review seeks to ensure the integrity of the Bank Merger Act of 1960 by providing sufficient banking choices and limiting global systemically important banks’ (GSIBs) market power. The Fed is asking for comments, and updates are likely to follow.
- Advanced notice on rule changes to resolution planning, including total loss absorbing capacity (TLAC) extending to non-GSIBs: The same week that the Fed put a notice out about the TLAC notice on risk capital extension, the agency approved U.S. Bank’s acquisition of MUFG Union Bank—and noted concerns about larger banks hovering near or just below the $750 billion GSIB threshold.
- Joint proposal to modernize Community Reinvestment Act regulations: The Fed, Federal Deposit Insurance Corporation (FDIC), and OCC jointly seek to strengthen regulations addressing credit inequities and adapt to industry changes, including mobile and online banking services not anticipated at the Act’s 1977 signing.
- Expanded Consumer Financial Protection Board (CFPB) role in financial institution M&A: While not part of the voting process on approving deals, the CFPB has been very vocal on deserving a seat at the table.
Tax developments
One high profile development internationally is the 15% global minimum tax (Global Anti-Base Erosion or GloBE) rules, which continues to move ahead. Agreed by more than 130 member countries of the Organisation for Economic Co-operation & Development (OECD) in 2021, GloBE creates a framework for a worldwide common corporate taxation. Its Pillar Two relies primarily on book accounting data versus tax data, with a variety of adjustments, including those relating to deferred tax expenses. These facts are likely to add complexity and compliance burdens to impacted companies. Pillar Two is expected to take effect on January 1, 2024, for most jurisdictions, suggesting that companies may spend much of 2023 getting ready for its implementation.
Only South Korea has enacted legislation to adopt the GloBE and the European Union recently announced unanimous support for Pillar Two. When enacted, Pillar Two may drive companies to pay tax in jurisdictions where they might otherwise not be subject to taxation and likely will increase cross-border investment costs. Financial institutions will need to consider Pillar Two’s impact before pursuing M&A on the international stage as Pillar Two can be applicable if any entity in a corporate structure is in a jurisdiction that has adopted Pillar Two.
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