Japanese megabanks, among the active buyers of banking assets in Southeast Asia, will likely become more selective as the coronavirus pandemic clouds the sector's outlook as well as deal pricing, analysts say.
The uncertain economic environment may drive down asset valuations, creating potential buying opportunities as the Japanese lenders look for new income sources overseas to counter their stagnant businesses at home, analysts say. Indonesia and Myanmar are still high on their M&A radar, they say.
On the other hand, all three Japanese megabanks – Sumitomo Mitsui Financial Group Inc., Mitsubishi UFJ Financial Group Inc., and Mizuho Financial Group Inc. – may opt to conserve capital as a risk buffer if the global economy slows further and for longer, effectively limiting their war chest and risk appetite. All three are designated global systemically important banks, or G-SIBs.
"On a net balance, this sort of crisis probably makes M&A deals more likely rather than less likely, because I think that the effect of prices getting cheaper will be larger than the negative effect on their appetite," said Michael Makdad, a senior equity analyst at Morningstar. "It is a sort of a constant appetite but they're careful," he said.
Though momentum has come off recently, the Japanese had been aggressively buying banking assets in Southeast Asia over the last decade, attracted by the region's rapid economic growth and substantial adult population without bank accounts in countries such as Indonesia and Myanmar. Lately, investors from other parts of Southeast Asia and South Korea have also shown interest in deals in the region.
Bangkok Bank PCL signed a deal to buy an 89.12% stake in Indonesia’s PT Bank Permata Tbk from Standard Chartered PLC and PT Astra International Tbk, in a US$2.6 billion deal announced on Dec. 12. The deal has placed Bangkok Bank on track to become the sixth biggest lender in Southeast Asia. Sumitomo Mitsui Financial Group and Singapore banks DBS Group Holdings Ltd. and Oversea-Chinese Banking Corp. Ltd. too were reported to have been in the race to buy a stake in Bank Permata.
Recent transactions by Japanese banks include MUFG increasing its stake in Indonesia’s Bank Nusantara Parahyangan in Indonesia's PT Bank Nusantara Parahyangan Tbk to almost 100% via a merger with PT Bank Danamon Indonesia Tbk, which MUFG has a 94% stake in, and Sumitomo Mitsui Financial Group acquiring 57.35% of Bank Tabungan Pensiunan Nasional of PT Bank Tabungan Pensiunan Nasional Syariah Tbk.
"Japan's major banks are more willing to acquire and invest" in this economic environment, said Naohisa Fukutani, a partner at PricewaterhouseCoopers. However, they will likely be "very selective," he said, adding they must have "thoroughly scrutinized" possible deals abroad, especially in Southeast Asia.
Deals may thrive in uncertain time
Most global markets have been battered this year by the outbreak of the novel coronavirus, and the outlook appears cloudy for now. But that environment might make M&As more attractive in terms of valuations, said Makdad.
Fukutani added that the uncertain economic environment may also make Southeast Asian banks more willing to welcome possible Japanese investment, though selectively.
Southeast Asian banks trust that the Japanese would keep employee layoffs to a minimum. Also, Japanese banks would likely honor their commitments and not seek to bargain harder to because of their position of relative advantage. Finally, the Japanese banks are likely to have cash on hand to complete deals.
Indonesia and Myanmar are high on the target list given that both countries have a large proportion of unbanked population, Fukutani said. Makdad named Indonesia, Vietnam, and the Philippines as potential acquisition destinations for Japanese banks.
According to World Bank data, 95 million Indonesian adults are unbanked, more than half of the adult population. Other Southeast Asian developing economies also present opportunities: Only 34.5% of adult Filipinos are banked, while the ratio is even lower at 30.8% in Vietnam and 26% in Myanmar.
Only for bigger players
The opportunity appears lucrative, but profitability indicators in the past few years suggest that banks in many Asia-Pacific emerging markets are struggling with rising risk costs. McKinsey's latest Asia Pacific Banking Review released July last year showed that return on average equity of banks in Indonesia in 2018 was 13.2%, lower than 17.4% in 2014, and inching closer to the global average of 9.5%. However, Vietnam banks' ROAE in 2018 was 12.2%, up from 7.3% in 2014.
Apart from the unbanked population, Japanese banks may consider competition from existing local players as an important factor. Countries such as China and India provide a plethora of opportunities thanks to their large population, but large local players already dominate the market, Makdad said. So, these Japan megabanks have set their eyes on Southeast Asia, where they stand a better chance to become significant players.
Although Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group appear to be the most active investors, some smaller Japanese players have also acquired stakes in banks overseas. In 2016, Japan's SBI Holdings Inc. acquired a 6% stake in Indonesia's PT Bank Index Selindo. However, analysts say these second-tier banks are less likely to venture abroad as they are still focused on their domestic businesses.
"It is quite unlikely that the second-tier-group banks, excluding local banks, in Japan would invest in the banks abroad," Fukutani said, adding that they are still putting in effort to secure their domestic businesses and may not have the "financial muscle" to venture abroad.