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Australia's financial services companies will turn to mergers and acquisitions as they deal with lower profit growth and competitive pressures, according to a report by the Australian firm MinterEllison.

The report, 'M&A Outlook: Australian Financial Services Towards 2030', notes that financial services companies are dealing with the fallout of last year's Financial Services Royal Commission, which looked into misconduct in the banking and financial services sector and recommended that 76 changes be made to the Australian financial industry to produce tougher regulations and improved governance. Most have been adopted by the government.

"Competitive factors, regulatory costs and lack of scale will result in M&A being one of the tools that is increasingly considered for addressing competitive pressures faced by financial institutions," the report states.

MinterEllison also said banks and other financial institutions are dealing with additional pressures, including lower inflation and interest rates, high levels of household debt and growing life expectancy. They are facing increasing competition from overseas and from nimble and well-funded technology-driven upstarts, which are delivering powerful customer experiences and seeking to disrupt the status quo. This creates a challenging environment for profitability and growth, especially for the larger financial services players in Australia, the report says.

"A key element of change in the financial services sector will be M&A, as existing companies look to transform themselves. They will do this by slimming down and becoming more focused, expanding into areas promising higher growth, or acquiring or integrating with innovative fintechs offering superior customer experiences, or stronger regulatory compliance," the report states.

Financial services M&A volumes have been robust, with a 7% increase in deal value in the 12 months leading to June 2019 compared with the previous 12 months, according to MinterEllison. However, there has been a slowdown in the first half of the current financial year.