M&As in the Asia-Pacific finance industry will likely recover in the second half of the year, driven by anticipated interest rate cuts and improved valuations.
The number of deals in the region was flat in the April-to-June quarter, with 138 transactions compared to 135 in the same period of 2023, according to S&P Global Market Intelligence data. However, the second-quarter total was higher than the first quarter's 111 deals.
"The valuation gap is expected to narrow in the coming quarters as inflationary pressures subside," IBISWorld industry analyst Ryan Tan said in an email. The reduction in the valuation gap, combined with potential interest rate cuts in the coming months, could spur deals in the region, Tan added.
Rate cycle
Most analysts expect interest rates to shift in the second half. The European Central Bank cut rates in June, while the US Federal Reserve may cut rates in September. Among major central banks in Asia-Pacific, the Bank of Japan raised rates twice in 2024, seeking to normalize monetary policy after years of negative rates. The People's Bank of China maintains an easing bias.
The finance sector includes banks, nonbank financial institutions and companies in insurance, fintech, payments and specialty finance.
The number of deals in the region's banking sector rose to 18 in the second quarter, from 11 in the previous year. The rise of digital banks and fintech firms has disrupted traditional banking, forcing lenders to revise their strategies and focus on cost optimization. Banks are using M&As to grow their clientele and strengthen their digital capabilities, Tan noted.
The asset management sector saw the number of deals nearly halve to 28 in the period, from 53 in 2023. Deals in the financial technology sector increased to nine in the second quarter, from four in the year-ago period, according to Market Intelligence data.
Regional variance
Deals in mainland China rose to 27 from 20 in the prior-year period, according to Market Intelligence data.
Chinese financial firms are under pressure to expand their client base and infrastructure, according to IBISWorld's Tan. Consequently, they seek to increase market share, enhance operational efficiency and achieve cost savings. This has led to high-profile deals such as Guolian Securities Co. Ltd.'s proposed acquisition of Minsheng Securities Co. Ltd., Tan said.
In India, finance sector deals increased to 26 in the second quarter from 22 a year ago, driven by the nation's rapid economic growth.
"China's economic restructuring and India's robust growth are pivotal, with the latter attracting significant banking investments and M&A activities," according to KPMG's Stephen Bates.
The Indian economy is projected to grow 7.0% in the fiscal year ending March 31, 2025, and 7.2% the following year, according to the Asian Development Bank. China's economy grew 5.3% year over year in the first quarter. The development bank expects China's GDP to grow 4.8% in 2024 and 4.5% in 2025.
Japan became a hotspot for M&A in the second quarter, with 18 deals announced, up from 11 in the same period last year. This increase is likely due to companies rushing to close transactions before anticipated interest rate hikes.
Southeast Asia reported a decline in M&A activity. In the second quarter, the number of deals in Singapore fell to four from 10 in the same period last year. Indonesia deals dropped to zero from three, Thailand to two from seven, and Vietnam to one from nine. Analysts expect this trend to reverse.
Deals could rebound in the fourth quarter "due to cross-border expansion opportunities and potential monetary policy adjustments," Bates noted. High-growth countries in Southeast Asia could see an uptick in M&A activity as businesses seek to capitalize on expanding markets, he said.
