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Asia finance M&A faces ongoing pressures as Q3 dealmaking falls


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Asia finance M&A faces ongoing pressures as Q3 dealmaking falls

M&A activity in the Asia-Pacific finance sector looks set for more time in the doldrums on the back of deal counts falling almost 15% in the quarter ended Sept. 30.

Total finance-sector deals in the region dropped to 132 in the third quarter, from 141 in the prior three-month period, according to data compiled by S&P Global Market Intelligence on a best-effort basis. It compared with 155 deals in the same period a year ago. A dip in M&A activity in mainland China and Southeast Asia mostly drove the decline, even as a surge in deals in India partly offset this.

A high interest rate environment, a challenging fundraising market and geopolitical uncertainties all weighed on dealmaking, analysts said — and these conditions look set to continue through to early 2024.

"Until these conditions change, along with the appearance of new drivers for dealmaking, I expect financial sector M&A in APAC to remain mostly in the doldrums in the coming quarters," Justin Tan, a partner at global law firm Mayer Brown's corporate and securities practice, said via email. "The fall in financial sector M&A in 3Q 2023 is a continuation of an ongoing trend since 4Q 2022 and 1Q 2023," Tan said.

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The decline in Asia-Pacific finance-sector M&A in the third quarter was broadly lined up with global trends, as investors remained on the sidelines. Global announced M&A deals dropped 28.3% to 8,775 in the third quarter from a year ago, according to Market Intelligence's quarterly global Q3 2023 M&A and Equity Offerings Market Report. Various headwinds, including economic uncertainty, the likelihood of higher-for-longer interest rates and geopolitical unrest, clouded the outlook for global deals, according to the report.

Bright spots

While a quick, cross-sectoral turnaround in M&A activity is not likely, a few bright spots exist for potential dealmaking, analysts said. These include a quick rebound in fintech M&A, the continued allure of China's wealth management sector and the possibility of Japanese regional bank deals.

"Measured on a volume basis, it wouldn't surprise us to see fintech M&A bounce back quickly — there is plenty of undeployed capital and opportunities," said Craig Loveless, a partner at global law firm Norton Rose Fulbright.

Deal count in the fintech sector in the Asia-Pacific rose to 7 in the third quarter from 4 in the prior quarter and just 2 in the year-ago quarter, Market Intelligence data show. The fintech deals included India-based Elpro International Ltd.'s purchase of an additional 7.43% stake in Jio Financial Services Ltd., bringing its total stake in the company to 10.25%.

China's wealth management and life insurance sectors hold a lot of promise for more M&A activity, thanks to continued foreign and domestic investors' interest, said Barnaby Robson, a partner of deal advisory at KPMG China.

The interest is "propelled by both domestic and international investors keen on tapping into the expansive and yet expanding mid-level income demographic," Robson said.

In addition, deals may happen in the Japanese banking sector as regional lenders may opt for M&A to survive the tough times.

"A rise in interest rates could increase actual or unrealized losses at regional banks, possibly hurting their capital ratios," said Masahide Endo, senior consultant at Daiwa institute of Research's management consulting department. "This may force local lenders to survive the tough times through M&A."

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Key markets

Divergent M&A trends are likely to continue in the region's key markets, including China, as investors remain risk-averse amid an uncertain growth outlook, interest-rate and geopolitical uncertainties, analysts said. In the third quarter, China accounted for just 13 finance-sector M&A deals, sharply down from 23 in the same quarter a year ago, Market Intelligence data show. The deals included Shengjing Bank Co. Ltd.'s asset sale, the largest transaction by value at $24.07 billion, in the quarter.

"The outlook for the financial services M&A landscape in China is one of cautious optimism," Robson said. "While the testing economic environment poses impediments, it also provides opportunities for investors which are well capitalized with distinct competitive edges, and a clear long-term strategic vision for their operations in China."

Finance-sector deal activity surged in India, the fastest-growing large economy in the world, jumping to 35 deals in the third quarter from 24 in the year-ago quarter. In Australia, deal count remained flat year over year, at 28, the data show.

"India continues to benefit from a confluence of positive factors, including restructuring of activities by multinationals in light of geopolitical tensions," Mayer Brown's Tan said. "Strong growth in the fintech sector with continuing digitalization also drives a lot of growth in India."

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A temporary phenomenon?

Despite the tepid outlook, some analysts said the slowdown in M&A activity in the region is likely to be temporary, and the trend could reverse in 2024.

"From what we see, there are still capital and M&A opportunities, and so we are in a temporary period where the market finds new valuation levels (rather than a prolonged slow down)," said Norton Rose Fulbright's Loveless. "Given Southeast Asia is such an attractive investment opportunity for financial institutions, we expect this trend to reverse in this market next year."

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