Banking M&A Outlook for 2025: Cautious Optimism Ahead
KPMG’s most recent examination of the M&A landscape within the Financial Services sector delves into M&A figures across the banking, capital markets, and insurance industries. This comprehensive report, titled “Measured Momentum,” provides an in-depth exploration of the Basel III Endgame and forecasts the future of M&A within the financial services sector.
Peter Torrente, who serves as the US head of Banking and Capital Markets at KPMG, expressed a sense of cautious optimism regarding the outlook for dealmaking in 2025. Despite seeing a rise in deal volume in Q3, the value of deals decreased compared to the previous quarter. However, the year-to-date performance of M&A activity continues to be promising.
The re-introduction of the US Basel III Endgame (B3E) regulatory regime is anticipated to alleviate the capital constraints faced by banks in comparison to the previous proposal. This revised version of the B3E requires banks to secure less additional capital overall, alongside an increase in the asset threshold for compliance. This favorable shift is likely to prompt banks with assets falling between $100 billion and $700 billion to consider M&A activities, positioning themselves as either buyers or sellers. Although there is still room for revisions in the re-proposal, it is considered to be a positive development for the banking M&A landscape.
In Q3 of 2024, four out of the top eight deals were concentrated in the insurance sector, with significant acquisitions made by both Marsh & McLennan and a private equity consortium. Subsequent Federal Reserve interest rate cuts are expected to drive down the costs associated with deal financing, consequently stimulating M&A activities, particularly for private equity entities aiming to deploy capital. However, persistent factors such as regulatory ambiguity, economic uncertainties, and geopolitical risks continue to moderate the overall optimism within the banking and insurance M&A space.
Looking ahead to 2025, Torrente shares a positive sentiment, highlighting the business-favorable atmosphere and the expectation of reduced regulation. The closure of 2024 marked a period of strong fourth-quarter earnings across the US banking industry, with enhanced bank stock valuations paving the way for a positive start to the new year. Despite this optimism, uncertainties stemming from the US election outcome and subsequent regulatory concerns have slightly dampened the prospects for future M&A activities.
Torrente emphasizes the compelling case for bank consolidation, underscoring the significance of the ongoing revisions to Basel III in instilling a sense of certainty within the regulatory environment. He notes that various segments within the banking landscape, including local, regional, and super-regional banks, have distinct motivations for pursuing consolidation strategies. Super-regional banks seek to expand their product offerings and geographical footprint within the US, while smaller regional and community banks are compelled to target economies of scale and invest in technological advancements to drive growth.
Moreover, Torrente highlights an encouraging trend wherein potential acquiring banks are enhancing their M&A capabilities, indicating a proactive stance towards future deals. Banks are focusing on areas beyond traditional due diligence, such as data governance, technology infrastructure, and AI capabilities, to ensure preparedness for potential M&A transactions. This heightened level of preparation suggests a strategic approach in adapting to the evolving landscape of the financial services sector. Ultimately, as indicated by Torrente, this preparedness is crucial for navigating the complexities and opportunities that lie ahead in the banking M&A realm.