Asian financial services firms undaunted by credit crunch as M&A activity reaches record levels, reveals PwC survey

SINGAPORE , 13 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 (PwC) 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 PwC based on deal data provided by M&A Asia.

“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 are in the top 21 global companies by market capitalisation. But Asia is, of course, more than the ‘China story’. Growth in financial services M&A activity is evident across the region as well,” says Dominic Nixon, PwC Asia Financial Services Leader.

In a survey of 281 senior executives, conducted as part of the 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.

“As the knock-on effects of the sub-prime mortgage crisis continue to be felt in the US and Europe, Asian economies appear to be driven by a different dynamic. Asian economies are in robust shape, registering only a single-digit percentage fall in total M&A transactions in 2007, as compared to the double-digit percentages in Europe and North America,” says Mr Nixon.

“Many 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. Asian financial services institutions need to acquire more sophisticated products and expertise to meet the increasing wealth of populations across the region. Few firms have a coherent strategy on how to adapt to satisfy these demands in future,” continues Mr Nixon.

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 PwC’s 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 in markets like Korea and Thailand 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.

“Growing a financial institution is a delicate balancing act. While there is clearly no reward without risk, over-aggressive expansion can undo years of hard work. The challenges are all the greater in the uncertain regulatory environment and volatile markets that Asian financial services firms face today,” adds Mr Nixon.

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.

“The Asian consumer is already powerful and is changing the way financial institutions operate in the region. Banks and insurers are enhancing their investment management divisions and 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,” Mr Nixon concludes.

 

• Chia Sher Ling (Direct line: (65) 6236 3961, Email: sher.ling.chia@sg.pwc.com )