Mergers and acquisitions (M&A) activity among US financial services (FS) companies fell sharply in Q3’23 compared to the second quarter and on a year-to-date basis.

Deal volume and value dropped 15.8% (to 1,078 deals) and 40.5% (to $45.3bn), respectively, versus Q2 according to KPMG. The corresponding year-to-date declines were 36.8% and 58.2%. The results of Q3 followed a small uptick in volume and value during Q2, dashing hopes that activity may have approached or reached a bottom.

The usual suspects

The main influences on sentiment remained the macroeconomic forces that have driven financial and deal markets since 2022, with a dash of US political intrigue. Dealmakers focused on interest rates and inflation and their implications for economic growth. The Federal Reserve raised its benchmark federal funds rate by 0.25% in July, to a range of 5.25%–5.50%. According to KPMG, this bare-bones hike left investors wondering whether there was more to come (and how much).

Furthermore, long-term interest rates (in the form of the 10-year US Treasury note) have significantly risen, from 3.8% percent in mid-July to 4.8% at the beginning of October. Annualised headline inflation rose in July and August for the first time since June 2022, prompting jitters that the Fed would have to hike more aggressively.

Better days ahead?

It would be easy to go with the flow of pessimism that pervades the M&A worldview these days. KPMG agrees with the consensus view that interest rates will remain high at least through mid-2024. This should discourage transactions by keeping borrowing and operating costs at lofty levels. But there are several factors that suggest an upturn may be taking shape. The first is anecdotal. KPMG reports that client conversations indicate that companies are more actively considering acquisitions and adding to their dealmaking capabilities.

Jonathan Froelich Partner Deal Advisory & Strategy FS Leader, said: “Many of our clients have completed thematic analysis of a variety of financial services subsectors to proactively plan for deals in early 2024. Another factor is the ongoing need for consolidation across the key FS subsectors of banking, capital markets, and insurance.

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData

“While market conditions have kept dealmakers on the sidelines, competitive pressures to bulk up or slim down are a constant and show no signs of abatement. Finally, we believe that the economy is likely headed for a soft landing rather than a recession, which traditionally translates into lower borrowing costs. Activity should start to revive as this outlook becomes the new consensus.”

US M&A Q2 2023: five largest bank deals

Banking was the only one of the key FS subsectors whose M&A activity increased in Q3’23 versus Q2. Deal value jumped 81.8% (to $3.6bn from $2.0bn). This was primarily due to Banc of California’s $1.1bn acquisition of PacWest Bancorp. Deal volume rose 14.0% (to 106 from 93). Year-to-date comparisons were mixed, as value fell 15.9% (to $21.1bn from $25.1bn) and volume rose 4.4% (to 282 from 270) versus the same period in 2022. The quarter’s top five banking deals featured regional banks and fintechs. All were strategic in nature, focusing on ongoing industry consolidation.

In the largest deal, Banc of California seized an unexpected opportunity to buy a competitor. PacWest’s capital base had deteriorated along with those of similarly troubled Silicon Valley Bank and First Republic earlier in the year. This enabled Banc of California to purchase the remaining PacWest assets at a bargain-basement price.

Boston-based Eastern Bankshares acquired local competitor Cambridge Bancorp for $528.0m. This reinforces Eastern’s position as the largest community bank in Massachusetts and New Hampshire by deposits.

Evertec, a leading full-service transaction processing business in Puerto Rico, the Caribbean, and Latin America, paid $478.8m for Sinqia, a technology provider technology for financial institutions operating in Brazil.

Virginia-based Atlantic Union Bankshares expanded into North Carolina by acquiring American National Bank & Trust for $416.8m.

Burke and Herbert Financial Services’s $371.5m purchase of Summit Financial Group added branches in West Virginia, Kentucky, Maryland and Delaware to Burke & Herbert’s base in the Washington, DC metropolitan area.