A tough environment for deal making: Q3’22 M&A trends in financial services

M&A activity in financial services (FS) fell in Q3’22—the third consecutive such quarterly decline. Deal making slowed across the three subsectors of capital markets, banking, and insurance. Compared to Q2, aggregate FS deal volume dropped 26.6 percent to 1,386, and aggregate deal value fell 70.0 percent to $61 billion.

The main cause of the weakness in activity was the macroeconomic environment, primarily in the form of higher inflation and rising interest rates. Along with a strengthening U.S. dollar, these headwinds combined to pull stocks downward and sharply boost companies’ cost of capital—two major negatives for deal makers.

We believe macroeconomic conditions will be the primary determinant of FS M&A activity in Q4 and extending into 2023. Financial services companies generally should exercise caution about doing deals, while those with healthy balance sheets and strong competitive positioning will be opportunistic at a time when many potential targets are vulnerable.