M&A in the Asia-Pacific banking sector will likely stay subdued after plunging to a 10-quarter low
The M&A deal count in the region's banking sector dropped to 10 in the three months ended June 30, compared to 17 in the previous quarter and 19 in the year-ago period, according to S&P Global Market Intelligence data compiled on a best-efforts basis. Transactions included whole-bank deals, asset sales and minority investments.
The last time fewer quarterly deals were recorded was during the COVID-19 pandemic in the fiscal third and second quarters of 2020, when, respectively, 7 and 9 transactions were completed.
"Confidence is the most important element for strategic investors engaged in long-term M&A transactions, particularly within the banking sector," said Alex Wong, head of M&A advisory at FTI Capital Advisors LLC. "The uncertainties surrounding global economic growth undoubtedly contribute as a crucial factor, if not the most critical one."
Several factors influence companies' strategic thinking regarding M&A strategies and their willingness to engage in deals, including conflicting geopolitical developments, disparities in valuations, lingering effects from previous interest rate hikes and the great expense associated with debt financing cost for acquisitions, said Wong.
The fall in banking sector M&A in the Asia-Pacific region was in line with global trends, as interest rate hikes affected economic growth prospects while increasing financing costs for investors looking to pursue deals. The value of second-quarter global M&A transactions plummeted 42.4% year over year to $564.03 billion, and the number of transactions dropped 25.7% to 9,584. The volume of transactions in the Asia-Pacific region held up better due to less severe inflation in China and Japan, but total transaction value in the quarter still fell 42.9% year over year to $110.61 billion, according to Market Intelligence data.
Waiting for revival
A revival of M&A activities is not likely anytime soon given the challenging market environment, analysts said.
There is no lack of capital and opportunities in the market, but the valuation reset is ongoing given this uncertainty, said Miranda Zhao, head of M&A for Asia-Pacific at Natixis CIB. While dealmakers' efforts to pursue creative structures and financing solutions will help close some deals, it is unlikely to lead to a market revival at this point, Zhao said.
"We are waiting for signs that we are approaching the bottom, which will include normalized interest rates and a stable macro-economic outlook," Zhao said.
Not only was there a drop in actual deal numbers, depressed investor sentiment also had an impact on values. There was just one deal in the second quarter — SBI Regional Bank Holdings Co. Ltd.'s purchase of a minority stake in SBI Shinsei Bank Ltd. — that topped $1 billion, according to Market Intelligence data.
M&A activity trend in the banking sector may be similar to that of 2022, said Samson Lo, co-head of Asia-Pacific M&A at UBS Global Banking.
"Investors are waiting for optimism in the next two quarters," Lo said. "The dealmaking activity may pick up in the last quarter of the year due to pent-up demand, and if the stock market returns to good levels by September."
Bright spots
Still, a few markets will remain hotspots for dealmaking given their attractive demographics and as investors shift their focus from China to other markets.
Citing Mitsubishi UFJ Financial Group Inc.'s acquisition of Home Credit Philippines and Indonesia, FTI Capital's Wong said ambitious acquirers from Japan and South Korea are actively competing with regional banks in Singapore and Thailand to secure high-growth targets in emerging Southeast Asian markets.
"We anticipate that this competition will continue to drive banking M&A throughout Southeast Asia," Wong said.
Investors are also shifting their attention to India, which is viewed as a promising major growth market. India's central bank expects India's economy to grow 6.5% in the fiscal year started April 1 following a 7.0% expansion in the prior fiscal year.
The recent merger between HDFC Bank Ltd. and Housing Development Finance Corp in India "may catalyze additional significant mergers among domestic players and entice large foreign financial institutions to expand their market presence through acquisitions of Indian banks or nonbank financial institutions," Wong said.