Macroeconomic headwinds dampened financial services M&A in Q2

Deal making in financial services (FS) fell in the second quarter. Comparisons to the first quarter—which also was weak—were negative both in aggregate and across the three subsectors of capital markets, banking and insurance. Aggregate FS deal volume fell 30.9 percent to 1,442 from 2,087 in the first quarter, and deal value dropped 14.8 percent, to $163 billion from $191 billion.

Steep increases in interest rates and inflation primarily drove the decline in activity. The Federal Reserve hiked US rates in May and June by a total of 125 basis points, and annualized headline US inflation reached 9.1 percent in June—the highest such monthly rate since December 1981. Growth projections for GDP and corporate earnings fell accordingly, forecasts of recession increased and plunging stock prices reduced the attractiveness of equity as a deal currency.

Our view on the prospects for financial services M&A over the next six‒12 months is mixed. On one hand, the fundamental trends that have been driving activity remain in place. On the other, market sentiment is largely pessimistic and the outlook for interest rates and inflation is challenging.