Asia’s financial institutions are in the hunt for good targets, market volatility and economic uncertainty notwithstanding, finds PwC research

In Singapore, prospects for both inbound and outbound financial services M&A will be strongly positive in the next 12 months as 50% of the respondents indicate that M&A is being considered.

SINGAPORE, 3 October 2011-   Total deals value in the financial services sector in Asia in the first half of 2011 at US$27.7bn was significantly higher by 39.6% than the first six months of 2010 at US$19.8bn. According to the latest PwC Survey on financial services M&A in Asia, the appetite for deals is picking up again after the 14.3% decline in the immediate year after the 2009 global financial crisis. More than half (58%) of the 375 senior executives surveyed indicate that they are either very likely undertaking (27%) or are already considering (31%) material M&A in the next one year.

Dominic Nixon, Asia Pacific Financial Services Leader, PwC LLP Singapore, says:

“Of interest in the Asian financial services deals to-date is that they are not just concentrated in one or two localities. Rather, we are seeing an almost equal increase in the geographic spread of deals across Asia.

Restructuring may be the main driver of activities to-date with a number of groups from outside the region divesting business acquired during the pre-crisis years, but the push for deals over the next two years will be coming from a growing need to consolidate footprints to match the growing ranks of mass affluent customers, trade flows and investment.”
 

Domestic private consumption is seen as the key driver for in-market consolidation, especially in fragmented markets like Vietnam. From the Survey, the most positive responses towards M&A are coming from fast growing markets like China, India, Indonesia and Vietnam. More than a third (37%) of the respondents predict that domestic business will expand by more than 10% in the year ahead. Another 39% forecast a growth of between 5% and 10%. Domestic and same sector scale-building, especially in retail and commercial banking sectors are seen as the most rapid way to accelerate customer acquisition, and to offset the effects of margin pressure and declining fees.

Cross-border financial services M&A in Asia is also poised for a new and more positive cycle of activity. Wholesale banking and wealth management sectors are more likely than most to follow their customers abroad. Investment management and private banking are the sub-sectors of financial services most likely to consider using M&A to enter new markets. Buyers from within Asia have been developing intra-regional acquisition strategies that range from full acquisitions to joint ventures and distribution partnerships.

Dominic Nixon says:

“North American and European financial groups that had managed to rebuild their capital bases in the post 2009 crisis have rediscovered their appetite for exposure to Asia in the past year.

But in the next 12 months, renewed economic uncertainty in the US, the scale of the sovereign debt problems in Europe and the cost of external capital for financial institutions could potentially create additional opportunities for Asian-led acquisitions.”

Singapore has been identified as the second most attractive M&A market (23%) in the region after China (37%), especially those respondents from the capital markets and wealth management industries. The other attractive locations are Hong Kong (21%), Malaysia (19%), Thailand and Japan (both 17%) and India (16%). Singapore-based respondents interested in M&A opportunities cite China, Malaysia, Taiwan and Singapore itself as the most attractive outbound locations, with Hong Kong-based respondents adding India and Vietnam to the mix.

Sam Kok-Weng, Financial Services Transactions Partner, PwC LLP Singapore, says:

“In Asia, more mature markets like Singapore backed by its status as a global financial hub provide a stable base for financial institutions from which to make regional forays. The high level of core strength and capital strength suggest that Singapore’s major banking and insurance groups are well placed to make further acquisitions overseas.”

Capital restrictions are seen by 34% of the all Survey respondents as the leading obstacle to M&A in the industry in Asia and more respondents expect the new Basel III regime to have a direct effect on bidder behaviour.  Medium-sized Asian financial services companies for instance may find it difficult to obtain access to external funding. The impact of the new regime will vary widely across the region. Compared with respondents in other Asian markets, Singapore respondents are fairly relaxed about the impact of Basel III on M&A activity. Singaporean banks tend to have stronger capital ratios and the impact of additional requirements on M&A is expected to be minimal.

Sam Kok-Weng says:

“Growth sectors in Singapore such as investment management and private banking which carry lower capital requirements, are witnessing significant interest. However, demand is outstripping supply.”

Respondents indicate a lack of attractive targets as the next obstacle to M&A activity. The Survey shows that financial firms in Asia are less likely to divest than to acquire. However, disposals remain on the agenda. A total of 47% of respondents see divestments as being likely or under consideration compared to the 31% who view disposals as unlikely or as having been ruled out. More than half of the respondents indicate that the primary motive for divestment is to focus on core business, while 31% of the respondents cite freeing up capital as the reason.

Sam Kok-Weng says:

“The new Basel III regime has a direct impact on deal activity in Asia, influencing its volume and type. It could stimulate short-term divestments to raise a seller’s capital ratio. Continued market volatility and economic uncertainties also mean that financial services groups based outside Asia may well pull back from the region, although less urgently than during the 2009 global financial crisis.

Outbound Singapore acquirers are that finding bidder competition and price expectation gaps are obstacles to M&A. Although the valuation situation has improved considerably since the 2009 crisis, poor information on deal targets in new growth sub-sectors in emerging markets remain a challenge for acquirers. In these markets, there is little pricing track record to go by and acquirers will have difficulty obtaining reliable valuations. Less mature and more volatile markets also mean unpredictable growth rates.”

ENDS

About the PwC Financial Services M&A in Asia Survey

The PwC Financial Services M&A in Asia Survey 2011 was conducted in May and June 2011. A total of 375 senior executives in financial services were surveyed across 13 Asian territories, using a combination of individual client interviews, our own qualitative research and the input of PwC M&A experts in the region. The deal data cited in the report reflects the financial services deals reported by Thomson Reuters, announced during 2010 and expected to complete. Transactions without a publicly disclosed deal value are included in ‘Number of deals’ but do not contribute to total deal values. Selected deals announced during the first half of 2011 are also discussed in this report, but do not form part of the 2010 dataset.