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M&A values in financial industry to surpass 2017 levels: Baker McKenzie

Singapore

MERGERS and acquisitions (M&A) in the financial sector in the Asia-Pacific is forecast to rise above 2017 levels this year, driven by Chinese outward investment, according to a recent Baker McKenzie study.

The global law firm said that M&A values in the Asia-Pacific's finance industry will rise 60 per cent to US$122.7 billion in 2018 compared to last year.

The joint report with Oxford Economics added that the values of these deals are boosted by the world's five largest banks by assets - four Chinese and one Japanese - reflecting the "growing clout" of the Asia-Pacific's financial sector.

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"The large Japanese banks have a deliberately international focus and are likely to pursue further strategic investments," Baker McKenzie said.

The Industrial and Commercial Bank of China, the biggest bank by assets, made its first foreign acquisition in 2007 when it bought a 90 per cent stake in PT Bank Halim Indonesia.

"As the largest economy in South-east Asia, Indonesia has been targeted by many foreign banks, as demonstrated by recent activities by HSBC, China Construction Bank and The Bank of Tokyo-Mitsubishi UFJ," said Erwandi Hendarta, banking and finance partner at Hadiputranto Hadinoto & Partners.

"We expect these types of transactions to continue for several years."

Baker McKenzie said that besides the Chinese and Japanese banks, other players in Asian financial services, though much newer, will still have a global impact in 2018 and beyond.

One camp of contenders is Alibaba, Alipay, and Ant Financial, which is behind digital payment technologies in countries like India, the Philippines and South Korea. The second is Tencent and WeChat Pay, which have almost one billion customers in China and "frequently" hit annual growth of 50 per cent.

In a phone interview on Thursday, Stephen Bates, partner, Deal Advisory, Financial Services, KPMG Singapore, told The Business Times: "We expect deal volumes to increase by about 10 per cent (in the Asia-Pacific).

"We've got significant investor appetite from private equity and private capital, and financial institutions looking to invest across the region. Globally, there's about more than US$600 billion of dry powder in private equity that is looking to deploy across the region."

He added that M&A in the financial services space in the Asia-Pacific will continue to be more active in China, Japan, Australia and India.

In Asean, although there will be a continued inflow of foreign monies into Singapore, Mr Bates said most dealmakers show "significant interest" in Indonesia, Vietnam and Thailand across banking and insurance.

"We're also seeing that in fintech businesses or non-bank financial institutions," he added.

And the fintech space is one to watch, as both inflow and outflow deals will be "very active" in this area.

"We're working on a number of deals in fintech which is series B, C funding rounds, and Singapore is a fantastic place given its regulatory support. It's a great place to raise funds and then take those funds to develop their products and invest it in the region."

On March 26, Singapore-based Grab ended months of speculation of a merger when it announced that it had acquired Uber's South-east Asia operations for an undisclosed sum.

Uber will take a 27.5 per cent stake in Grab. With the acquisition, Grab will take over Uber's operations and assets in Cambodia, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Baker McKenzie said fintechs will also fuel the increase in listing values as they scale up and look to initial public offerings (IPO) to raise additional funding or to provide exits for their private equity and venture capital investors.

In the Asia-Pacific, numerous fintech companies are also tapping the IPO markets, as well as insurance companies in countries like India, where the sector is growing rapidly and valuations have been "soaring".

According to Baker McKenzie, M&A values in the global financial sector will rise to US$616 billion in 2018, up 25 per cent from US$462 billion in 2017. This is attributed to "ultra low" interest rates, tech-enabled disruption, and regulatory pressure, which have created an environment to drive M&A activity across the financial sector throughout 2018 and beyond.

But as interest rates rise, global trade and investment growth slows, and equity prices correct, M&A values in the financial sector are forecast to fall to US$569 billion in 2019 and US$450 billion in 2020.