Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the October 10, 2006 issue of the Bangkok Post.
By Kulvech Janvatanavit
This is the first of two articles based on PricewaterhouseCoopers' survey ''Going for Growth*: The Outlook for M&A in the Financial Services Sector''.
For an increasingly aggressive community of senior decision-makers, new entry into such tempting markets as China and India is no longer a question of ''if'', but of ''when''. Moreover, the ''when'' at stake depends far more on factors other than policies or regulations, such as core competencies, corporate culture, and product and market expertise.
According to a recent survey of financial services executives by PricewaterhouseCoopers and the Economist Intelligence Unit, 68% of respondents said that joint ventures and partnerships were central to their firms' expansion plans in Asia. The drivers, the pursuit of new markets and new customers, the constant drive to improve process efficiencies, and the realisation of economies of scale, are familiar. But the urgency is new.
M&A activity among financial institutions in Asia is expected to gain momentum, spurred by the promise of market liberalisation, whether real or imagined. Even so, the depth of market liberalisation in Asia's banking and finance industry varies greatly.
The most aggressive policy reform has taken place in East Asia. In China, reform of the larger state-owned banks saw several institutions introduce foreign capital. Across the strait, Taiwan has been busy liberalising its financial-services sector. Reforms have set specific targets for consolidation, including a reduction in the number of state-run banks and financial holding companies.
In contrast, Southeast Asia's financial-services industry remained relatively quiet in 2005. From an M&A perspective, Indonesia's market was perhaps the most active, with continued consolidation among the country's more than 130 banks, in accordance with the central bank policy. A similar drive to consolidate an over-serviced financial sector is under way in neighbouring Malaysia.
In Thailand, the financial sector master plan implemented two years ago has driven domestic consolidation among the country's financial institutions. Regulators have given clear signals that it is only a matter of time before they will liberalise the market. While there are still ceilings on foreign direct investment of 25% with a limited equity stake where any one bank can buy only 5% in another, the Bank of Thailand has readily approved exceptions on a case-by-case basis. The recent GE-Bank of Ayudhya deal was one such case, and it is expected that more will be approved and supported by both the BoT and the Ministry of Finance in the near future.
In South Korea, the climate continues to favour domestic financial holding groups over foreign entities.
There are some liberalisation moves afoot in South Asia as well, albeit less monumental ones. In March 2004, the Indian government raised the ceiling on foreign direct investment in private banking from 49% to 74%, but the Reserve Bank of India (RBI) subsequently limited the equity stake that any one bank could buy in another to 5%. The RBI has since announced that the limit is discretionary, and that it will consider applications to buy more than 5% of a private bank on a cases-by-case basis, looking at the standing and reputation of the foreign buyer both in India and globally, as well as the bank's plans for India.
Despite some bold moves, protectionism still abounds in the region and is in danger of escalating. While stringent state regulation and oversight aimed at protecting consumers is increasing and should be supported, regulation aimed simply at protecting local business is still common.
Will regulatory constraints truly relax to the point where these firms can operate freely across borders? This is neither a bet anybody would be willing to take, nor really the point. In contrast to years past, the importance of regulatory liberalisation as a driving force for restructuring pales in comparison with that of competition and customer demands (see chart).
Fewer than a quarter of the respondents to our survey cited uncertain regulatory requirements as a main obstacle to increased M&A. In fact, regulatory barriers elicit far less fear and loathing today than they did five years ago. Today's financial executive has learned to look beyond a target country's regulatory environment, to consider long-term political opportunities, demographic and macroeconomic trends, and opportunities to leverage core strengths in new areas and markets. Smart institutions anticipate situations where regulatory change will help them, and attempt to influence the process.
As market windows open across Asia, those who wait for all regulatory hurdles to come down will miss opportunities. Competition for assets will only intensify. It makes little sense to allow regulatory issues to dictate M&A strategy.
Investors have been willing to engage regulatory authorities over the long haul, either directly or through an influential local partner. Negotiating regulatory hurdles has become just another cost of doing business.
In two weeks' time, the second article in this series will look at M&A success strategies for financial-services executives in Asia.
