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The Asian Banker recently published its research paper on merger and acquisition (M&A) activities in the banking industry, identifying top M&A deals and key trends in Asia Pacific. Deal frenzy continues to seize the Asia Pacific banking sector, with the total value of mergers and acquisitions (M&A) between depository institutions, credit institutions and bank holding companies topping $31.8 billion in 2006.
Of the past five years, this has been the second busiest, surpassed only by 2005 - when the total value was $49.3 billion, having been bolstered by the $27-billion mega-deal to create Asia's largest lender, Mitsubishi UFJ Financial Holding. Excluding deals in Japan, the total banking M&A in the Asia Pacific in 2006 has actually soared 96.1 percent from the previous year to $30 billion and tripled the volume of 2002. Intra-regional investments in the banking sector shot up to $4.2 billion in 2006 from merely $0.9 billion in 2005, outshining the 25 percent growth of inter-regional investments Despite ongoing developments and liberalisation in the Asia Pacific, the level of sophistication in each country's banking sector remains varied. Banks in less-developed financial systems in the region will be seeking additional capital as well as international expertise and best practices to support business expansion and economic growth, creating opportunities for cross-border investments. Inter-regional deals led by non-Asia Pacific acquirers have increased 25 percent to $11.6 billion in 2006, featuring global incumbents such as Goldman Sachs, Citigroup and Standard Chartered. Notably, intra-regional investments shot up to $4.2 billion in 2006 from merely $0.9 billion in 2005, outshining the growth of inter-regional investments. The most recent activities observed in intra-regional deals also entail a surge of investments from less-developed banking systems, such as China Construction Bank's acquisition of Bank of America (Asia) in Hong Kong, and Industry and Commercial Bank of China's acquisition of Bank Halim in Indonesia. After successful mega-IPOs, the once under-capitalised Chinese state-owned banks are now better prepared to pursue their overseas exposure. Domestic deals and cross-border deals contributed almost equally to total Asia Pacific banking M&A activities in 2006, despite much higher cross-border contribution in the previous two years if we exclude the ups-and-downs in Japan Asia's two biggest emerging economies, India and China, contributed 29 and 24 deals respectively to the total 142 deals announced in the Asia Pacific in 2006, dominating the top two spots in terms of deal volume by country. While India's M&A agenda was centred around merging small players into big ones, China was more engaged with the regional and global institutional investors that deployed $9.1 billion, or 57.2 percent, of the total cross-border deal value in the Asia Pacific to participate in the quick transformation of the country's banking landscape. In terms of deal value, China emerged as the most popular location for M&A, dominating over one-third of the aggregate with 2006-announced deal value amounting to $11.4 billon. South Korea was next-most popular with $9.2 billion while Taiwan and Malaysia followed somewhat behind with less than $3 billion each - although the figures are considerably higher than those of the previous year as the long-delayed market consolidation is finally poised to take off. The largest deal in 2006 was Shinhan Financial Group's $7-billion acquisition of LG Card in South Korea (Shinhan spent another $893 million on the remaining 14.3 percent stake in LG Card in May 2007), which also marked the largest takeover in Korean history. With the LG Card purchase, Shinhan has replaced Kookmin Bank as the No.1 credit card issuer in the country amid the strong rebounding of the card business. The M&A market is trending toward being more seller-driven with the price-to-book ratios (P/B) of the banking sector inching up across all major regional economies except Japan As corporate governance, risk management processes, profitability and asset quality steadily improve across the Asia Pacific's banking sector and more investments are pumped in, the M&A market is trending toward being more seller-driven with the price-to-book ratios (P/B) of the banking sector inching up across all major regional economies except Japan. Take the recent cross-border deals in China as examples: Bank of America paid 1.2 P/B to purchase a nine percent stake in China Construction Bank in June 2005; just one year later, Banco Bilbao Vizcaya Argentaria had to pay 3.3 P/B to acquire a minority stake in health lender China CITIC Bank. China will remain the most powerful draw of cross-border investments in the next two years, but this will abate slowly due to the accomplishment of the large banks' IPO processes. More investments will flow into the better performers of the second-tier joint-stock banks and third-tier city commercial banks. In China's domestic market, we also foresee a more visible trend of consolidation between local lenders, especially between the city commercial banks, which have now been given the go-ahead to expand into other cities. It is very likely a handful of provincial-level players will emerge through the government-led mergers of local lenders. Foreign institutional investors are also eyeing Indian banks, but it is a matter of whether the regulator will be more accommodative after 2009 - it has already issued guidelines prohibiting foreigners from acquiring healthy banks until 2009. Thus, future M&A activities in India's crowded banking market will still be very much a local play. The government has directed a number of mergers among state-owned lenders in the past - but it remains to be seen whether these are real consolidations or just combinations of two messy balance sheets. So far, ICICI has been the most successful local bank in driving the M&A agenda to grow inorganically, but this is set against a background where most other private sector banks in India have yet to demonstrate leadership due to lack of scale and access to capital. In South Korea, fierce competition and further liberalisation will continue fuelling the consolidation process in the banking market. Like their peers in the highly saturated Australia, Hong Kong and Singapore markets, Korean banks will find increasingly more appeal in the deals that target players with strong retail focuses, wealth management focuses or overseas operations. In Taiwan, foreign banks have grown more aggressive in the aftermath of the card crisis, as many small lenders are desperate for capital to sustain operations. Standard Chartered Bank took over Hsinchu International Bank in September last year while Citigroup and ABN AMRO recently acquired Bank of Overseas Chinese and Taitung Business Bank respectively. However, foreign investments do not really help to reduce the number of players in the domestic market, and policy markers have yet to come up with effective measures to accelerate the consolidation process. Strong M&A activities among banking institutions will most likely continue to be sustained in the coming years. However, the rationales driving the deals - better operating efficiency, higher capital and diversified businesses - have yet to be realised amid integration pains. We will just have to wait to see a more consolidated, healthier and more interrelated banking system forming up step by step in each major economy of the region. |
