M&A activity involving Asian financial institutions is at unprecedented levels

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22 May 2008 – M&A activity involving Asian financial institutions is at unprecedented levels, with Asian firms seeing little impact so far from the current credit crunch. Indeed, 43% said that the credit turmoil could actually increase the volume of M&A deals in Asia, according to a new PricewaterhouseCoopers report “Going for growth in Asia: Navigating the way.”

Asia-Pacific financial services M&A deals were up from US$68.5 billion in 2006 to US$105.9 billion in 2007, according to figures released by PricewaterhouseCoopers based on deal data provided by M&A Asia.

In a survey of 281 senior executives, conducted as part of the PricewaterhouseCoopers report, 75% of respondents said their firm had been involved in an M&A deal in the past 3 years, up from 73% two years ago. The figure rises to 86% among Chinese institutions, while activity also picked up in India with 66% of Indian respondents saying they were involved in an M&A deal in the past 3 years.

Matthew Phillips, head of PricewaterhouseCoopers financial services M&A practice in China, commented:

“If there are any doubts that the balance of financial power is swinging towards Asia, one only has to look at the FT Global 500 index. Four Chinese financial services companies – ICBC, China Life Insurance, China Construction Bank and Bank of China – are in the top 21 global companies by market capitalisation.

“Banks and insurers are trying to establish themselves as all-round financial services providers and the big players are trying to rapidly round out their offerings both geographically and sectorally.”

In 2007, Japan topped the M&A list, with US$36.2 billion worth of deals last year, more than doubling the amount recorded in 2006. China was the second most active country in Asia for financial services M&As with deal volume at US$16.2 billion in 2007, up from US$11 billion in 2006. South Korea was the third most active hunting ground, with US$13 billion of deals last year, up from US$9.4 billion in 2006.

Life insurance was the busiest sector with 83% of life insurers surveyed having completed an M&A deal in the past three years.

Outlook

Strong and steady GDP growth and the continued emergence of a wealthy consumer class in Asia have created a fertile environment for further M&A activity in financial services. Nearly four in ten institutions said they will undergo significant M&A activity this year and 70% believe they will be involved in activity over the next five years. This is slightly higher compared with PricewaterhouseCoopers’ 2005 survey, when 68% said they expected M&A activity within five years.

Chinese companies were the most bullish, with 50% believing they will undertake significant M&A deals this year, and 71% in the next five years. In India, 76% of respondents expect to be involved in an M&A deal in the next five years, though only 34% expect to do a deal in the coming year. This may reflect the prospect of wide scale deregulation of banking in that market in 2009.

By contrast, the outlook for Japan is subdued, with nearly a quarter of firms saying a lack of capital is stopping deals. Just 16% of survey respondents envisage an M&A deal in the next five years. However Japan-based respondents believe M&A activity will pick up and 69% expect to do deals in the next five years.

The survey also suggests that retail banking is likely to see the most M&A activity. Nearly half of all retail banks said they expect to undergo significant M&A deals in the next year and more than three-quarters said they will be involved in activity in the next five years.

Obstacles to deals persist

Despite the optimism shown by survey respondents for the long term, the slow pace of regulatory change remains a concern that may inhibit M&A deals. Early signs are that regulators may be putting on hold further market liberalisation as they observe the contagious nature of the global credit crunch. Other longer-term impediments to deals include family control over many Asian institutions.

Targeting the wealthy

In recent years, the focus of much of the M&A activity has been on commercial banks, but this is likely to shift to retail operations as a consequence of consumers saving and investing more of their considerable accumulated wealth. In five year’s time, principal merger targets could be securities firms, asset managers and private banks.

Nelson Lou, PricewaterhouseCoopers Transactions Partner in Beijing, continued:

“The Asian consumer is already powerful and is changing the way financial institutions operate in the region. Banks and insurers are developing investment management divisions and many are also starting to offer wealth management services.

“Those institutions that seize the opportunity and invest in building capabilities necessary to deliver service improvements are likely to gain market share rapidly and seek to acquire rivals that have failed to exploit their customer bases.”

Notes for editors

For additional information, please contact Vera Totskaya, PR Manager, or Anna Aristova, PR Assistant Manager.

“PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.