M&A activity in the financial services sector has opened with a solid start. According to a KPMG quarterly update, the Q1 2019 report is the second highest than any other quarter since 2016 by deal volume. This positive start to the year suggests that the 11 percent increase in transaction volume last year may continue to surge. For both domestic and foreign buyers, the Canadian financial services sector continues to be an attractive investment. A robust Canadian M&A market is expected for the remainder of 2019 due to low-cost debt financing and supportive debt markets. KPMG has identified these trends in the Canadian financial services M&A market by examining several sectors.
1. Insurance
Compared to all other sub-sectors across Canadian financial services, insurance has experienced more activity in Q1 – with deal volume more than doubling the previous quarter. Access to speciality lines, technological capability, geographic expansion and adding scale are amongst the drivers of M&A insurance activity. KPMG expects that M&A activity in this sector will continue due to the market’s fragmented nature and the amount of high quality targets.
2. Asset and Wealth Management
Transactions relating to asset & wealth management in Canada has been steady. Deal value increased in Q1 by CAD 6.5 billion, while deal volume grew by 50 percent from the previous quarter. Drivers of M&A activity include competitive market pressure on fees, which include mutual fund fee reductions and ETF pricing, along with investment requirements for technology and regulatory compliance.
3. Banking, FinTech and payments
Although there has not been notable M&A activity by Canadian banks in the first quarter, the substantial level of M&A activity experienced south of the border by US banking could present Canadian banks with opportunities to continue to expand into the US market. However, high US banking valuations may be an obstacle. Moreover, additional banking transactions may be driven by divestiture of non-core operations for the remainder of the year, as “banks seek to free up capital and focus on strategic business lines and markets.”
On FinTech and payments, the year has begun with an encouraging start. KPMG believes that additional M&A opportunities may arise in Canada due to the anticipated changes to the Bank Act, since these amendments would allow banks to collaborate with FinTechs more efficiently. FinTechs are potentially disruptive and could function as a catalyst for future M&A activity, with banks hoping to acquire or collaborate with FinTechs in order to gain competitive advantage.
The outlook on the remainder of 2019 is positive, as growth or stability is anticipated. There are reasons to be optimistic about the deal-making environment in the Canadian financial services M&A market over the remainder of the year.
The author would like to thank Ceviel Alizadeh-Najmi, summer student, for her assistance in preparing this legal update.
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