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Banking: Consternation amid consolidation

The banking industry is likely to see further consolidation as banks seek to achieve economies of scale and enhance their digital capabilities. However, the recent unexpected shifts in M&A activity, which have defied previous expectations even without considering the tariffs and follow-on volatility, are shouting out loud that the market is even more unpredictable than was anticipated. As further easing of regulatory policies under the new administration comes to fruition, we expect that it will create a more favorable environment for M&A, further spurring consolidation efforts, but the actual outcomes may vary due to the current volatility. In our view, banks should continue to opportunistically focus on integrating new technologies and data analytics to stay competitive and meet evolving customer expectations despite the precarious market conditions.

Specifically, the recent tariff announcements have injected significant trepidation into the banking sector. The banking sector is continuing to closely monitor and assess the potential economic impacts from the evolving tariff proposals. Depending on the ultimate policy outcome, an economic slowdown could result in reduced income fee, increased credit costs, and a reduction in loan growth.

Key areas of concern include:

• Trade financing: Banks that provide trade financing are seeing a cautious approach from clients as they navigate the new tariff landscape.
• Auto loans: The tariffs on imported cars and materials are likely to increase car prices, potentially reducing demand for auto loans and possibly leading to higher delinquencies.
• Mortgages: Elevated mortgage rates will likely continue to be a drag. The potential for hotter inflation and higher rates may squeeze bank margins.

The uncertainty surrounding tariffs is likely to dampen M&A activity, as banks become more cautious about making large acquisitions. Despite this, smaller deals may still proceed, driven by the need for consolidation and the faster approval process.

Insurance: Focus on digitalization and specialization

In the insurance subsector, we expect there to be a continued focus on digital transformation and the acquisition of specialized firms to address emerging risks and enhance operational efficiency. The growing demand for excess and surplus (E&S) insurance coverage should fuel additional M&A activity in the subsector. Insurers will need to leverage advanced analytics to better predict and manage risks, and to offer more tailored products to meet the needs of a diverse customer base.

Capital markets: Win with data-driven decisions

We anticipate that capital markets will remain active, with asset management companies pursuing M&A to boost their capabilities in private markets, diversify their offerings, and expand their geographical reach. The ongoing need to adapt to technological advancements and evolving market dynamics will continue to drive M&A activity in this subsector. Firms will need to stay agile and use real-time data analytics to make informed decisions and capitalize on emerging opportunities.

In the short term, dealmakers must remain vigilant and proactive as they navigate the twists, turns, bumps, and unexpected detours on the road ahead. With so much market instability, institutions will need to aggressively manage risks related to inflation and consumer caution.

Firms that stay focused on strategic moves and remain nimble in their decision-making will have a unique opportunity to enhance their capabilities, expand their market presence, and position themselves for significant growth through strategic acquisitions. To achieve this, they will need to prioritize data-driven decision-making, leverage advanced analytics, and maintain a flexible approach to M&A.