Improved dealmaking conditions mean M&A activity in the Asia-Pacific finance sector is set for a rebound even though deal count fell 2.8% year over year in the quarter ended Sept. 30.

Interest rate cuts and improved economic conditions are creating a more conducive environment for dealmaking, according to analysts.

There were 138 finance industry deals in the region in the July-to-September quarter, down from 143 in the second quarter and 142 in the same period of 2023, according to S&P Global Market Intelligence data. While the decline was seen across the industry, it was more acute in the insurance and specialty finance sectors.

Geopolitical tensions persist, but factors like interest rate cuts and improved economic conditions are likely to drive a rebound in activity, said Stephen Bates, head of deal advisory and partner at KPMG Singapore.

"While there are still challenges ... the overall outlook for M&A in the APAC finance sector is positive," Bates said.

Substantial optimism

A substantial amount of optimism for M&A recovery in 2025 exists following an increase in global deal volumes in the third quarter and the possibility of positive indicators like further rate cuts by the US Fed, which will lower financing costs, according to Market Intelligence's M&A Equity Offerings Market Report. Global M&A announcements rose 7.3% year over year to 10,582 deals in the third quarter, driven by 17.3% growth in the Asia-Pacific, according to the report.

The Asia-Pacific finance sector was an underperformer in the third quarter as the number of all-sector transactions in the region increased to 2,742, up 16.1% from the previous quarter and 17.3% from the year-ago period. The total value of deals increased to $165.81 billion, nearly doubling the previous quarter's total and a 37.7% jump year over year, according to the report.

In addition to interest rate cuts, improved economic conditions should bode well for M&A activity in the region, analysts said.

The International Monetary Fund upgraded its 2024 growth forecast for Asia and the Pacific to 4.6% from 4.5% in April, "largely reflecting the over-performance in the first half of the year," according to the fund's regional economic outlook report.

Bucking the trend

Finance sector M&A in mainland China and Japan increased year over year in the third quarter, contrasting the broader trend. Deal count more than doubled year over year to 21 in mainland China, while it rose to 14 from 12 in Japan, Market Intelligence data showed.

India, Australia and South Korea, on the other hand, saw year-over-year declines in the number of deals.

M&A activities across sectors in mainland China increased "because public companies are under the pressure to acquire good assets," said Yang Wang, M&A Asia partner and managing partner for Beijing at American law firm Dechert LLP.

While the government's financial stimulus did not drive the activity, it probably provided another layer of confidence to some investors, Wang said.

In Japan, deals, including those in the finance sector, are expected to remain "on an upward trend" for the rest of the year versus a year earlier, said Masahide Endo, a senior consultant at Daiwa Institute of Research's management consulting department.

One of the drivers for M&A in Japan, Endo said, is a government guideline set in August 2023 that allows unsolicited takeover bids and prevents credible offers from being turned down without serious consideration.

Likewise, South Korea is expected to see strong deal flows.

"South Korea and Japan's outbound activity in the finance sector will remain high," said Raghu Narain, head of investment banking, Asia-Pacific, for Natixis CIB.

Big deals

Half of the 10 largest M&A deals in the finance sector in the third quarter happened in mainland China, led by Guotai Junan Securities Co. Ltd.'s $14.25 billion acquisition of Haitong Securities Co. Ltd.

Overall, deal sizes are likely to remain lower than historical levels, KPMG's Bates said.

"Overall, while the immediate outlook remains optimistic, deal sizes are likely to remain lower than historical levels and include more complex structures to support deal financing and downside protection for all parties," Bates said.

South Korea and India each contributed two deals to the list of the 10 largest, while the Philippines added one.