Emerging Opportunities – Financial Services M&A in Asia 2011

Globally, financial services are undergoing unprecedented change. At the same time, the eastward shift of economic power gives Asian financial services markets stronger growth potential than that of any other region. As a result M&A is becoming an ever more important strategic tool for financial institutions in Asia.

Recommended actions

• Scenario planning: Assess the potential evolution of specific markets and sectors, and develop detailed executable plans under a range of scenarios. Recognise that adversity can present attractive opportunities.
• Building credibility: Develop individual and institutional credibility with regulators, central banks and investors over time so that the groundwork has been laid before a specific deal comes onto the market.
• Considering talent: Ensure that human capital considerations are part of the M&A process from the start. Begin planning who will run the business you acquire, and how, long before the deal is closed.
• Remaining flexible: Consider a full range of approaches to M&A including strategic investments, joint ventures and partnerships, as well as outright acquisitions.

We believe that M&A in Asian financial services is poised to accelerate. Domestic activity will continue to dominate, but there will also be increasing appetite for cross-border transactions. Despite regulatory and governmental activity, the survey predicts stronger levels of M&A for late 2011 and 2012.

M&A predictions

Respondents’ predictions for financial services M&A in Asia over the coming year are strongly positive:

Figure 22: Do you expect M&A activity to increase in your market during the next 12 months?

Source: PwC Financial Services M&A in Asia Survey 2011

M&A appetite

More than half of those surveyed expect their organisation to undertake or seriously consider a material M&A transaction during the coming year:

Figure 6: Likelihood of considering or undertaking material M&A during the next 12 months

Source: PwC Financial Services M&A in Asia Survey 2011

Domestic M&A remains the predominant driver of Asian financial services transactions. Strategic drivers include domestic competition, customer acquisition, pressure on operational and capital efficiency, the desire to broaden product offerings and divestments by investors from outside the region.

Enhancing the customer experience

Figure 10: Attractive areas for firms using M&A to expand into new lines of business

Source: PwC Financial Services M&A in Asia Survey 2011

Improving product offerings and the customer experience is a key driver of domestic M&A, along with the desire to acquire new expertise and expand into new business lines. Financial conglomerates are forming in a number of Asian markets.

Financial institutions across Asia see M&A as a crucial tool in the search for higher growth. Bidders from more mature markets such as Australia, Japan, Korea and Singapore are being joined by European and American rivals. Chinese firms could also join the hunt for targets.

Looking for growth

Figure 13: Most attractive areas for geographic expansion via M&A

Source: PwC Financial Services M&A in Asia Survey 2011

It is no surprise that the huge, fast-growing Chinese market is identified as the most attractive for geographic expansion via M&A. The attractions of China are well known, but at a time when many financial groups are seeking a credible Chinese strategy this also highlights the dangers of herd behaviour.

Asian financial institutions identify a range of factors that can act as obstacles – or enablers – to completing transactions and making them successful. Capital restrictions emerge as the greatest obstacle to M&A, while talent management is seen as by far the greatest challenge for post-deal integration.

Focusing on capital

Figure 17: Expected effects of Basel III on M&A in Asia

Source: PwC Financial Services M&A in Asia Survey 2011

Capital restrictions are seen as the greatest limitation on deal activity, with respondents’ concerns higher now than when the question was last asked in 2009. Basel III is a particular source of uncertainty. More than half of those surveyed expect the new regime to lead to greater focus on the capital efficiency of transactions.