Asian banks and non-bank lenders may rethink deals amid pandemic-induced slowdown

Thinning margins, capital depletion and the need for new sources of growth amid the lingering pandemic could lead some Asia-Pacific financial institutions to consider mergers or acquisitions, particularly in China and Asia Southeast, analysts said, after third-quarter trading activity fell to the lowest level in at least three years.

In the quarter ended September 30, there were 26 M&A transactions in the banking and specialty finance sectors in Asia-Pacific, the fourth consecutive quarter of decline, according to data from S&P Global Market Intelligence . The number of transactions was also at its lowest since at least the fourth quarter of 2017.

Specialist financing drove deals in the region, with 22 deals in the third quarter, the same as in the previous three months, the data showed. However, the number of bank transactions fell to 4 during the July-September period from 9 in the previous quarter and was also the lowest for at least three years.

The COVID-19 pandemic has slowed down transactions around the world. the The US banking sector, for example, disclosed 81 transactions worth a total of $ 7.75 billion in the first three quarters, compared to 200 transactions worth $ 47.05 billion in the same period in 2019, according to data from Market Intelligence .

However, transaction activity may accelerate as the pandemic increases stress among lenders. “We believe the forces that are undermining the strength of the Asia-Pacific banks point to possible consolidation, as they put pressure on the banks to gain advantages of scale,” said Joydeep Sengupta, senior partner at McKinsey & Company. in Singapore, at S&P Global Market Intelligence. “The gap between the strongest and weakest banks is widening and will likely accelerate consolidation,” he said.

The most active mergers and acquisitions markets

China leads the region in terms of transaction activity between banks and non-banks. In the three years ended September 30, 42 banking transactions and 97 specialized financial transactions were completed in the world’s second-largest economy.

In the banking space, the second busiest market is Indonesia, where relatively high net interest margins and economic growth have attracted acquisitions by Japanese and Korean banks, which are struggling with poor growth prospects. in their country.

In the specialty finance industry, which includes peer-to-peer lenders and auto financiers, India has concluded 91 deals in the past three years, just behind China.

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China leading the pack

China is expected to remain the hotspot for bank and non-bank lender deals, analysts say. The Chinese economy was among the first in the world to reopen after it was also the first to be affected by the pandemic in late 2019. Many small and medium-sized banks and non-bank lenders are open to buyers as they cope. to a financial crisis and escalating US-China trade tensions.

Barnaby Robson, business advisory partner at KPMG China, said the acquisition of distressed small lenders by public institutions or larger lenders with “the encouragement” of the government was a substantial part of the financing deals of mergers and acquisitions in the region.

“We expect this form of consolidation to continue, and possibly gain momentum in markets where smaller lenders increasingly face liquidity issues,” Robson said.

In recent years, several bank M&A deals in China have involved government-affiliated buyers where state-owned entities have injected capital into smaller, distressed lenders in return for equity. For example, government-related entities acquired 18.51% and 9.98% shares of Harbin Bank Co. Ltd. for $ 1.93 billion and $ 743.1 million, respectively. Separately, Bank of Jinzhou Co. Ltd. sold stakes to Industrial & Commercial Bank of China Ltd. and others.

China will push for reforms and mergers and acquisitions among small lenders affected by the pandemic, The Nikkei reported in April, citing Cao Yu, vice president of the China Banking and Insurance Regulatory Commission. Cao also said the regulator was keen to have involvement in the market. In November 2019, Bloomberg reported that authorities were considering measures to address risks at smaller banks, which may include encouraging troubled banks to merge or restructure, after The central bank of China has identified 586 “high risk” banks and financial companies.

Southeast Asia remains a hot market

Southeast Asia is likely to remain another bright spot for banking transactions, thanks to attractive credit lines, potential for loan growth, and relatively high unbanked populations. Indonesia, in particular, has completed 22 deals in the past three years, as its fragmented banking sector has attracted many Japanese and South Korean lenders.

Southeast Asia was home to most of the major banking transactions during the period. The agreements included Mitsubishi UFJ Financial Group Inc.‘s acquisition of PT Bank Danamon Indonesia Tbk, based in Japan Sumitomo Mitsui Financial Group, Inc.‘s purchase based in indonesia PT Bank BTPN Tbk, Thailand TMB Bank PCL‘s acquisition of Thanachart Bank PCL and Bangkok Bank PCL‘s acquisition of PT Bank Permata Tbk in 2020.

“Governments also recognize [foreign direct investment] is needed to compensate for low consumption and introduce reforms and incentives to attract foreign investment, ”Robson said. “North Asian lenders in particular are allocating capital and considering opportunities in ASEAN.

In one such instance, Indonesia is trying to remove barriers to foreign investment as its economy grapples with the COVID-19 crisis. The country Lawmakers passed a bill on Oct. 5 to cut red tape and make it more attractive to foreign investors. The law awaits the president’s signature, according to The Nikkei.

Analysts expect more M&A activity involving small banks in Indonesia. Three Islamic banking units of major commercial banks recently announced their merger. “Mergers and acquisitions in banking, in general, are likely to happen more often in the future, not just with Sharia banks,” said Harry Su, head of equity capital markets at Samuel Sekuritas Indonesia. “The growing gap between the big [four lenders] and the capital of the small banks would force further mergers and acquisitions to keep these small banks competitive through the increase in the capital base. “

Specialized finance to shine

Meanwhile, non-bank M&A activity remains robust in the region amid the availability of a larger pool of eligible investors.

“In most markets, non-bank mergers and acquisitions have been more attractive due to a combination of lower restrictions on foreign ownership and lower capital requirements, relative to banks,” said Robson of KPMG. “This has increased the pool of eligible investors, notably by creating openings for financial investors.”

McKinsey’s Sengupta said the inability of banks to meet strong demand for credit, especially from the SME segment in India and China, makes non-bank lenders “Essential to meet financing needs”. In addition, mergers and acquisitions in the non-bank sector are relatively easy to execute, with less stringent regulatory approvals and lower capital requirements, he said.

Non-bank lenders are generally associated with increasing default risks, especially peer-to-peer lenders, self-financing platforms and shadow lenders. Sengupta, however, said rThe high credit risk and nonperforming loans in the non-bank lender segment are actually favorable for M&A activity.

“Restructuring and consolidations are common when the financial sector goes through major credit cycles,” he said, noting that smaller players are likely to be under strong financial and regulatory pressures, while lenders established will seek opportunities for inorganic growth in such an environment.

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