Storm clouds make way for clearer skies as Asia Financial Services M&A returns to favour

Increasing trend of regional M&As in Malaysia

21 July 2010

While Asia Pacific escaped much of the effects of the global financial crisis, many financial services (FS) institutions in the region stalled their plans for M&A to focus on core business strategies. Now operating in clearer skies, confidence has returned and with it a renewed focus on M&A. In Malaysia, regional M&As are expected to increase with larger local banking groups leading this foray.

The proportion of Asian financial institutions expecting to do deals has returned to near pre-crisis levels. But new external factors and recent shifts in FS institutions’ business priorities have altered the landscape significantly, and firms face a raft of new challenges, according to a new report from PricewaterhouseCoopers (PwC), in collaboration with IDC Financial Insights Asia/Pacific.

The number of financial services deals disclosed in Asia slowed by 12% from 567 transactions in 2008 to 499 in 2009 with total disclosed deal value falling by US$8.2 billion. The decline was broadly spread with the largest decline in deal value seen in Australia.

Sridharan Nair, financial services partner, PwC Malaysia, said:

“The storm clouds that previously engulfed the M&A markets are lifting and we expect to see significant increases in the breadth of deal activity in the next year. Global players that survived the crisis are faced with limited growth in mature markets and are renewing their pursuit of opportunities in Asia. They will join the ‘super-regional’ players that have sustained deal activity over the last couple of years and together this will increase competition for deals.”

What Lies on the Horizon? New Players – New Rules – New Opportunities’ revealed a new impetus for activity in the Asia Pacific region. 81% of respondents expect M&A activities to ramp up in 2010 and indicated that size was core to success. 54% of respondents expect to evaluate or undertake M&A transactions in 2010, compared to 42% in 2009. Only 21% have pointed to the potential divestment of businesses in 2010, compared to 25% in 2009.

Soo Hoo Khoon Yean, financial services partner, PwC Malaysia, said:

“The 2009 mantra, ‘focus on what is core’, is no longer enough. Financial institutions have new found confidence and are exploring new sources of growth. 2010 will bear witness to a number of FS institutions making maiden forays into new geographies across the region. Countries likely to witness the highest number of new market entrants include Malaysia, Mainland China, India and Indonesia.”

The survey also highlighted that Asia’s ‘super-regionals’ have now gained the upper hand. As a number of global institutions scaled back their activities Asia-based institutions stepped up to fill the vacuum and are now aggressively undertaking acquisitions to support ‘super-regional strategies’.

Soo Hoo Khoon Yean, financial services partner, PwC Malaysia, said:

“Homegrown institutions are furiously building significant region-wide platforms to seize opportunities in the broader Asia Pacific market and to compete against established global players. As the Malaysian market gets more saturated, there will be increased demand for our larger local banking groups to pursue regional M&As. Accordingly, the ability for our local FS institutions to support regional business will be key.”

Regulatory changes will continue to shape the market during 2010. For example, new master plans are being brought to market for Thailand and Malaysia – the aim is to lift the efficiency and competitiveness of the industry, by encouraging consolidation and opening up the sector to a greater number of new or foreign players. Regulation was cited by 48% of respondents as a key challenge to post crisis growth.

Soo Hoo Khoon Yean, financial services partner, PwC Malaysia, said:

“Regulation will have implications on the future of the FS M&A market. In Malaysia, there are a number of positive developments including the entry of five new foreign banks into Malaysia. However, Basel lll proposals may substantially increase the capital requirements and liquidity constraints for some.”

“Regulators as a whole are expected to push to strengthen financial positions and equip banks with sufficient capital under the upcoming Basel III framework. As this still looms, it is difficult to chart a clear course at the moment,” adds Soo Hoo.

In the insurance sector in Malaysia, M&A trends are even more pronounced.

Sridharan Nair, financial services partner, PwC Malaysia, said:

“There were two recent and significant developments in the insurance sector in Malaysia - the liberalisation of foreign equity limits (up to 70% or even higher on a case by case basis) and the implementation of the Risk-based Capital Framework. These have been the catalysts for a number of M&A transactions that have taken place and will continue to happen over the next two years. The raising of the equity limits has triggered renewed interest amongst many foreign insurers. The Malaysian insurance market is viewed by many as relatively attractive, given the low penetration rate in the life insurance sector and a well-regulated and structured industry.”

 

ENDS

 

Note(s) to Editor:

1. The ‘What Lies on the Horizon? New Players – New Rules – New Opportunities’ report is the fifth PricewaterhouseCoopers (PwC) Asian FS M&A survey. It is based on face-to-face interviews, web and telephonic surveys with 122 senior M&A decision makers or influencers from across 13 territories in the region. It was conducted on behalf of PwC by IDC Financial Insights Asia/Pacific in March and April 2010.

2. The deal data has been sourced from Thomson Reuters.

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