75% of Chinese financial institutions plans engaging in M&A in Asia

Chinese survey respondents are more eager than the rest of their Asian counterparts to develop new lines of business via M&A.

As the focus of global economic growth rapidly shifts to the East, financial services (FS) mergers and acquisitions (M&A) in China, and Asia, are expected to accelerate in late 2011 and 2012. More than 75% of respondents from China indicated a transaction was actively under consideration or likely within the next 12 months, according to a new report from PwC, ‘Emerging Opportunities: Financial Services M&A in Asia 2011’. Chinese respondents to the PwC Financial Services M&A in Asia Survey 2011 are bullish about the prospects for M&A in their market, and are also upbeat about their own organisation’s M&A plans for the year ahead despite the recent reduction in FS M&A deal value by almost 30% in the first half of 2011 compared to the same period in 2010.

“Chinese institutions have mostly sat on the sidelines of global FS M&A since the crisis but as we enter into a new period of volatility there are signs that some may be tempted to enter the fray and pick up inexpensive but strategic assets,” said Matthew Phillips, leader of financial services M&A, PwC China. “I do not expect a big splash in a retail play in Europe or the US, but I would not be surprised to see Chinese buyers being increasingly aggressive in deals involving wholesale funding such as capital leasing and project finance as well as those involving key emerging markets trading partners.” 

The survey of Chinese respondents indicates that their interest is likely to be close to home with 60% expecting activity to be domestic or within the North Asia region, a further 38% expecting deals within Asia to predominate in the next 18 months. Only 3% felt that activity would be driven from beyond Asia. 

Findings from the survey, the most extensive in the six years that this report has been produced, show that Chinese respondents are keener than the wider Asian sample to develop new lines of business via M&A. They see corporate banking, investment banking, reinsurance and capital markets as the most attractive business lines. Interest in investment banking and capital markets is markedly higher amongst Chinese respondents than the rest of Asia indicating continuing interest in the domestic IPO market which has weathered recent volatility better than many other global financial centres. 

On a region-wide basis, respondents once again cited Mainland China as the area likely to witness the greatest level of activity, reaffirming its position as the most attractive destination for inbound activity, followed by Hong Kong and Taiwan. 

M&A activity is being stimulated by a range of strategic factors. These include high levels of growth and burgeoning domestic consumption, growing pressure on operational and capital efficiency, and ongoing divestments by strategic investors from outside the region. 

“Notwithstanding the economic uncertainties on the horizon, many Asian financial institutions are increasingly keen to use M&A to acquire customers, and to create financial conglomerates offering sophisticated product offerings to their corporate and high net worth clients,” said Christopher Chan, Advisory Partner, PwC Hong Kong. “In general, Asian regulators have been able to take a less stringent line on capital, liquidity and separation of retail and investment banking than their counterparts in the West. In some Asian countries, regulators are encouraging the emergence of stronger institutions but the spectre of protectionism remains.” 

Obstacles to successful M&A strategies do not end when the deal is signed. Post-deal barriers are a particular concern in financial services where IT systems are highly complex, reputations are easily damaged and regulators are watching closely. Respondents in Asia to the survey agree that these factors are all potential post-deal challenges, however, 51% identify culture and people issues as the greatest challenge for management in the region, according to a PwC report. 

“Cultural and people challenges can be difficult to manage in any industry, especially when M&A is taking place across borders or language barriers,” said Matthew Phillips. “The challenge is particularly acute in financial services, where the collective expertise of management and staff is often a firm’s most sustainable source of competitive advantage. Retaining talent is a key management challenge for financial services leaders at the best of times, let alone during the uncertainty that often flows an acquisition, so a considered approach to human capital management is vital at every stage of the deal process.” 

The report also reveals that over 50% of Asia respondents expect it is most likely that they will be involved in a deal over the next 12 months, or that a deal is under consideration for the coming year. In addition, more than 70% of the Asia respondents expect the prospects for FS M&A to either increase slightly or significantly in the next 12 months. Overall, in the medium to longer term, growth in Asian financial services will continue to be driven by a range of supporting economic and demographic factors, including the rapid emergence of middle-income customers.