Deal activity in the Asia-Pacific finance sector is set to gradually pick up after multiple factors, including high interest rates and a challenging fund-raising market, dragged deal count in 2023 to the worst level in at least a decade.

M&A in the Asia-Pacific finance sector fell 19.1% to 549 in 2023 from 679 in the prior year, according to data compiled by S&P Global Market Intelligence on a best-efforts basis. The 2023 total was the lowest yearly deal count since at least 2014, when 889 deals announced. The financials sector include banks, nonbanking financial institutions (NBFIs) and companies classified under the insurance, financial technology, payments and specialty finance sectors.

"The M&A market will gradually become more active in 2024" after an uptick in deal volumes in the fourth quarter of 2023, Dustin Ball, partner Asia-Pacific financial services strategy leader at EY Parthenon, told Market Intelligence via email.

Led by the US Federal Reserve, central banks in many jurisdictions started raising interest rates in early 2022 to try slow rising inflation. Coupled with geopolitical uncertainties and a banking crisis in 2023, the higher rates drove the cost of fundraising and dragged M&A and issuance volumes across the world. M&A deals in the global banking sector, for instance, hit the lowest level for at least five years in 2023, Market Intelligence data shows. While the Fed could begin cutting rates this year, analysts do not expect a quick rebound in M&A activity due to the high cost of raising capital and because of the ongoing geopolitical challenges.

US rates, pent-up demand

Despite this, the expected reduction in US rates and a backlog of deals, pent-up demand for dealmaking in 2024 will support a pickup in M&A activity in the Asia-Pacific finance sector, according to analysts.

"In particular, investors will be looking to see if the US starts to reduce interest rates, as this could be one driver for the revival of the M&A market overall," Ball said. "The pickup in activity toward the end of 2023 signals increasing optimism and potential, but there are still many issues that need to be resolved for this to continue further along this year."

Further, a backlog of deals and pent-up demand will help deal activities in 2024, though overcoming pricing and valuation gaps due to the higher cost of capital and other hurdles will be a challenge, said Allison Lee, partner in the corporate and securities practice at international law firm Mayer Brown.

"In the current market environment, parties will be laser-focused on M&A transactions that bring strategic value and complement their long-term business model," Lee said.

– Click here to download a spreadsheet with data featured in this story. – Click here to read our recent story on trends in Asia-Pacific banks' issuance of equity and debt securities in 2023.

Bright spots

India and Japan are expected to remain bright spots for Asia-Pacific finance sector M&A in 2024, analysts said, citing the former's solid economic growth prospects and the latter's supportive government policies, among other factors.

India was the only large economy in the region where more deals in the finance sector were announced in 2023 than in 2022. Investors struck 118 finance-sector deals in India in 2023, up from 114 deals a year prior, Market Intelligence data shows. While deal count in Japan fell to 46 in 2023 from 62 in 2022, this was in line with the 2021 total.

India's "stellar" economic performance should trigger continued foreign investment into the country well into the second half of 2024, even with a election taking place in the "middle of a boom," said Justin Tan, partner in the corporate and securities practice at Mayer Brown.

Conditions are also ripe for M&A in Japan to grow in 2024 as a number of supportive government policies and monetary policy boosts opportunities for investors. "Financial M&A activity in Japan will also gain momentum, driven by new takeover guidelines and persistent factors such as a weakening yen, population nearing retirement, and low interest rates," Lee said.

Elsewhere in the region, finance-sector deal count plunged to 81 from 100 in 2022 in China, and to 86 from 103 in Australia. In Australia, M&A deals are predicted to remain robust in 2024, even though volatility is still expected, as execution challenges continue, Ball said.