SIGNIFICANT M&A ACTIVITY PREDICTED IN ASIA’S FINANCIAL SERVICES SECTOR DESPITE CONTINUING PROTECTIONISM

NEW DELHI, 23 June 2006 - M&A activity within Asia’s financial services sector is expected to gather impetus over the next five years fuelled by a widening expectation of market liberalisation despite continuing obstacles posed by the regulatory environment and diverse corporate cultures, according to a report published by PricewaterhouseCoopers in association with the Economist Intelligence Unit.

The study, entitled ‘Going for growth: The outlook for M&A in the financial services sector in Asia’, sought the views of 130 senior executives in 19 countries in Asia’s financial services industry. More than two-thirds of survey respondents predict that their organisations will undergo significant M&A activity in the coming five years and an equal number agreed that joint ventures and partnerships would be the key to their expansion plans in Asia.

The value of M&A totalled US$38.7bn in 2005, a decline over the previous two years which saw large deals in Japan. However, the number of deals remained high at 194, with China picking up momentum as activity in Japan tapered off. Inbound M&A activity from the US and Europe replaced regional activity in 2005 as the larger source of M&A on a value basis. Inbound M&A was valued at more than US$23 billion compared to US$15 billion for regional M&A.

Jairaj Purandare, executive director and country leader, Financial Services,
PricewaterhouseCoopers commented, “Regulatory restrictions have kept India’s market penetration by international financial institutions low compared to domestic banks, despite many financial services companies operating here. Yet regulatory barriers are much more relaxed and loathing than five years ago as investors are demonstrating a willingness to engage with regulatory authorities either directly or through a local partner. This has become just another cost of doing business in the short term and prudent forward planning over the long term.”

The key shift in the region is that market barriers are having less of a drag on M&A activity in China, one of the most challenging markets from both a regulatory and cultural perspective. This is demonstrated by the value of inbound M&A that rose dramatically from US$2.4bn in 2004 to US$15bn in 2005; the number of deals went up over the same period from 27 to 35.

China is likely to remain the major target for M&A in the region. 52% of companies said that they expect to conduct M&A in China over the next five years and over a third (36%) will target India. No other region was selected by more than 20% of respondents. Adds Jairaj, “India ranked at the top of countries with 39% of respondents expecting financial services companies to most likely set up outsourcing arrangements.”

Increasingly, western banks are investing heavily in stakes in China’s largest banks with little in return in the way of operating control. But as part of these equity deals, many banks are also negotiating joint ventures in savings, insurance and credit card products.

Protectionism abounds in some of the region and there is a danger of escalation. While onerous state regulation aimed at protecting consumers is increasing and is to be supported, regulation aimed merely at protecting local business is still common and in some cases is actually increasing.

Achieving scale and efficiencies remained one of the key challenges and is particularly difficult to achieve in Asia where multi-channel strategies involving a combination of direct investments, equity stakes and joint ventures are often necessary. Barriers cited by companies included regulation, differences in corporate culture, defensiveness by managers of the acquired company and political interference. As per Jairaj, “Expansion in the region is powered by a strategic imperative to seek out new under-served markets and to meet a rising tide of competition from both domestic and foreign players.”

Financial services executives in Asia face growing pressure to satisfy shareholders, please customers and capitalise on their successes. With falling barriers, the threat of new competition continues to escalate, and executives have no choice but to maintain a constant surveillance of new market trends and growth opportunities, all the while trying to maintain a consistent corporate culture across disparate ethnic cultures and integrating any acquisitions already made. In order to succeed, PricewaterhouseCoopers believes that financial services executives will need to do the following:

• Be prepared for larger, more aggressive M&A, joint venture and partnership deals
• Know their company’s strengths and apply M&A to hone competitive edge
• Outsource back-office and other non-strategic operations
• Pursue M&A strategies despite regulatory uncertainty, not because of it
• Stay vigilant for operational efficiencies and opportunities for scale
• Ensure proper risk management is in place
• Use M&A as part of an overall growth strategy incorporating organic growth strategies as well

• The survey was conducted with 130 senior executives in Asia’s financial services industry exclusively for this briefing, prepared by the Economist Intelligence Unit for PricewaterhouseCoopers. For this report, the Asia region comprises: China, Japan, North Asia: Hong Kong, Macau, Mongolia, South Korea, Taiwan, South Asia: Australia, Bangladesh, Cambodia, India, Indonesia, Malaysia, New Zealand, Pakistan, Philippines, Singapore, Sri Lanka, Thailand.

• Deal volumes and values used in the report are based on announced completed deals and sourced from M&A Asia, March 2006.