Mergers and acquisitions remain a high priority for financial services players heading into the mid-2020s. The number of deals has declined since the historic pace of 2021, but average deal size has increased by 11 percent over the past two years based on Dealogic data. Notable deals in 2023 included UBS’s acquisition of Credit Suisse, JPMorgan Chase’s deal for First Republic, Nasdaq’s acquisition of Adenza Group, Reliance’s spin-off of Jio Financial Services, and FIS’s sale of a 55 percent stake in Worldpay to GTCR.
Our analysis shows that more than half of the 40 largest deals in 2023 were meant to rebalance portfolios or acquire assets of failing banks: 40 percent were divestments, carve-outs, and geographic exits, and 18 percent were acquisitions of the assets of collapsing US and European banks. About 20 percent were scale transactions meant to improve efficiencies and top-line growth; 22 percent were aimed at acquiring products, technology, or talent.
Will the same trends continue to shape dealmaking in 2024? Most of the financial services executives we talk to across financial subsectors in Europe, the Middle East, and Africa (EMEA) expect M&A to remain a high priority and to maintain or gain momentum. Most believe capability-building and scale efforts—including international growth and expansion into adjacencies—will be the biggest drivers in 2024.
And while most players say they have clear M&A strategies, we have found that some best practices have yet to become the norm, such as standing up teams to identify M&A targets, routinely scanning the market for transaction opportunities, and building the teams and tools to navigate the intricacies of complex deals.
Explore the full collection of articles from our Top M&A trends in 2024 report >
Scale and capability deals will dominate as banks seek avenues for growth and make selective carve-outs
We expect powerful industry trends to bolster M&A activity in banking—especially scale, capability, and carve-out transactions. According to the latest McKinsey Global Banking Annual Review, higher interest rates boosted the sector’s profits in 2023, with returns on equity in 2023 reaching about 13 percent—well above the average of 9 percent since 2010.
Returns varied widely, of course: some institutions delivered record performance, putting them in position to consider acquisitions of the many banks around the world that struggled to achieve returns above their cost of capital.1 Most deal rationales will fall into three categories: building scale, acquiring capabilities, or carve-outs to rebalance portfolios.
Building scale
Many banks with strong returns are now looking for strategic opportunities, including M&A, to enhance their positions and gain scale to boost efficiencies. Many of the laggards, meanwhile, will explore ways—such as divestitures and outright sales—to raise profits and even survive. We expect this trend to be more prevalent in North America, the Middle East, and Asia−Pacific, where the banking sector tends to be more fragmented.
In Europe, large-scale transactions—especially cross-border deals—remain limited due in part to the complexities of local licensing regulations, liquidity, and accounting implications, including fair value adjustments. Under such conditions, most European banks prefer organic expansion over inorganic growth. Netherlands-based ING, for example, has long followed an organic expansion strategy and now has a presence in six European countries.
Most M&A activity will likely continue to focus on domestic targets, but recent advances in the banking business model may enhance the value of some cross-border transactions. Such deals can provide diversification and immediate access to local talent, along with quicker value realization from accelerated market entry compared with organic growth.
Leading banks are addressing many of the challenges that have historically hindered such deals. They’re adopting cloud technology, for example; offering innovative digital journeys that can appeal to customers across borders; and most recently harnessing generative AI to improve customer service. As these technologies mature, they may offer European banks new avenues for growth and collaboration, accelerating the shift toward a more dynamic and interconnected financial ecosystem.
Unlike rescues, where speed is of the essence, scale deals meant to boost efficiency and growth require acquirers to determine how to preserve the fundamental value drivers of the target while overlaying their own management practices, culture, and commercial strategies. A carefully planned integration accounts for and captures the strengths and synergies of both organizations, preempts or overcomes regulatory obstacles, preserves critical talent, and manages the technology integration.
Acquiring capabilities
Most banks pursuing growth will seek not just scale but capabilities—especially technology—to speed delivery, improve customer experience, lower cost to serve, and digitize business models and distribution. Many banks will aim to acquire strong platforms, tech talent, and robust product portfolios that will strengthen their fee businesses. Ohio’s Fifth Third Bank, for example, acquired Rize Money, an embedded payments platform, in May.2 Tokyo-based Mizuho Financial Group completed its acquisition of Greenhill, an M&A and restructuring advisory firm, in December.
Many fintechs may look like great targets for banks seeking to build capabilities, especially in technology and talent, and the sharp drop in fintech valuations in 2022 might appear to signal that the subsector is ripe for transactions.3 In our experience, however, most banking leaders still view fintechs as expensive and lacking clear paths to profitability, and remain skeptical about the goodwill these acquisitions could create.
The truth is that many large banks struggle to integrate fintechs and would rather partner with them than acquire them. Indeed, we find that the success of fintech acquisitions often depends on talent retention and striking the right balance between full integration into the company and keeping some elements independent to preserve value and speed of delivery while sustaining innovation.
Private equity (PE) capital will also play an important role in fintechs, especially B2B fintechs and those with business models attractive to more conservatively minded investment committees. (For more on this topic, please see the sidebar, “How will private equity deploy dry powder in the coming year?”)
The future—and value—of carve-outs
In their ongoing search for improved return profiles, banks will continue rebalancing portfolios with divestments, carve-outs, and exits from non-core geographies—although perhaps at a smaller scale than in 2023. Some will seek to simplify their geographic footprints to focus on core markets. Others will divest or carve out units that may generate more value as standalone entities, such as payments, capital markets, and securities businesses. In these and some other businesses, banks may face a simple choice: scale them up significantly or make an exit.
While many observers believe carve-outs invariably provide more total shareholder returns (TSR), the latest research by our Strategy & Corporate Finance Practice suggests this is no longer true. We have found that only half of large carve-outs generate excess TSR; the remainder underperform in their sectors, averaging zero median excess TSR. While carve-out hypotheses are sound for most deals—increased strategic focus, fit-for-purpose operating model, and optimized capital structure—executives struggle to operationalize them.
Consolidation and capabilities in asset management
Asset managers have been grappling with cost pressures, margin constraints, and the largest decline in assets under management in almost a decade—about 10 percent in 2022 (exhibit). Research by McKinsey’s Strategy & Corporate Finance Practice shows that these firms’ profit margins dropped five percentage points from 2021 to 2022.4 As a result, asset management boutiques and midsize firms need to evaluate their scale, specialization, product mix, and overall ability to withstand pressures from larger firms while maintaining profitability.
Scale deals are already underway, and we expect them to continue; consolidation has reduced the number of asset management firms ranked in the Pensions & Investments money managers directory over the past decade.5 Capabilities will dominate many deal theses as asset managers seek to expand into new products such as alternatives and private credit through partnerships or more traditional acquisitions, creating streams. Franklin Templeton acquired Putnam Investments, for example, to expand into alternative products and retirement plans after years of asset outflows at both firms.6
Asset management valuations—now at a price-to-earnings ratio of 26:1, according to the latest McKinsey Global Banking Annual Review—will continue to pose significant obstacles to dealmaking. The problem is an excess of potential acquirers and a shortage of willing sellers. Successful acquisitions in this space require a continuous focus on retaining top private bankers, investment advisers, product specialists, and other investment talent.
Looking ahead
What will it take to benefit from an uptick in M&A activity—and turn it into sustained growth? We believe the most effective acquirers will see M&A as core to corporate strategy, institutionalize M&A capabilities for systematic deal screening and due diligence, and build the tools and execution muscle for rigorous planning and faster value capture.
To start, financial services players should strengthen the sophistication of their M&A capabilities. Too many players wait for opportunities to enter their radar rather than designating personnel or establishing specialized M&A teams to continually explore potential transactions, divestitures, and product acquisitions. A proactive, programmatic approach to scanning the market is crucial to staying ahead of the curve and maintaining alignment with strategic principles.
Once M&A is at the center of strategic thinking and resource allocation, successful financial services players fine-tune their deals to maximize value. They develop detailed value-capture targets, for example; pursue them relentlessly; and stay committed to rigorous planning. They do not succumb to premature celebration: the real work begins after the deal is closed, and it requires ongoing attention and meticulous execution.
In the wake of an acquisition, organizational priorities make or break the success of the transaction. They go beyond immediate financial gains to include safeguarding organizational culture and the strengths that prompted the strategic move in the first place, retaining top talent, aligning leadership, and designing a proper operating model.
Financial services M&A activity may not soon return to its recent historic highs, but expectations are high for considerable deal activity in 2024 and beyond, driven by the industry’s need to grow, harness new technologies and drive innovation, meet consumers’ ever-rising expectations, and become more resilient to macroeconomic and geopolitical volatility.
