M&A quarterly update in Asia-Pacific's financial services sector - Q1 2020

Q1 2020

1Q20 saw many companies across APAC pulling back from M&A activities, putting them on hold until the impact of the Coronavirus (COVID-19) outbreak becomes more certain. 1Q20 deal volume in Asia-Pacific's financial services sector decreased by 26% as compared to 4Q19 and total deal value fell by 53%, reaching its lowest level in the last decade. Despite the slowdown in the M&A activities, 1Q20 saw inbound deals increase by 24% in terms of deal volume, primarily driven by India attracting foreign capital with its long term growth prospect. Intra-Asia and outbound deals decreased by 58% and 43% respectively in 1Q20 as compared to 4Q19. With more restrictive temporary regulations on foreign investments put in place in Australia and travel restrictions globally, we expect to see a further slowdown in the cross-border deals in 2Q20.

Key highlights in Q1 2020:

  • Initial negative impact caused by the COVID-19 outbreak to financial services M&A market was emerging in this quarter, with further slowdown expected in 2Q20. Though there were industries that have been more severely affected by COVID-19 directly, such as retail, travel and tourism, there have also been some initial negative impact to financial services M&A market, specifically around numerous deals being withdrawn or delayed, driven by uncertainties over valuation or the macro economic environment.
  • In the banking sector, NPLs have been increasing and expected to surge as the borrowers are facing liquidity problems, particularly SMEs and large corporates in the affected sectors. With historical low global interest rates, banks are facing pressure on their top line. Coupled with this, there is an urgent need to reassess risk profiles and credit qualities, which will likely increase credit costs and place further pressure on margins. Despite the challenges, economic uncertainty creates opportunities to bring purpose to customers and for banks to embrace emerging technologies, driving deal flows in fintech space going forward.
  • Asset management sector consolidation continued; we have also seen significant drop of fee income given the declining trend in AuM from market down turn and capital outflow. 1Q20 witnessed financial services players seeking to expand the asset base through acquiring asset management targets in the markets such as Australia and Taiwan. Record amounts of funds have been pulled from asset managers, putting pressure on liquidity due to increased outflows. Despite the declining fee income, the downturn in the market has also presented  opportunities for well capitalised AMCs and distressed/special situation investors, who are sitting on the sidelines ready to pounce on attractive opportunities.
  • Despite insurance deals softening in this quarter, we expect the increasing M&A activities driven by the insurance sector opening-up. Foreign ownership relaxation in the insurance sector in India, Indonesia and Myanmar is expected to continue to attract foreign players setting up in the market. However, the profitability and valuation of insurers will be largely affected by the market volatility and historical low interest rate, whilst some of the insurers are likely to face increasing claims, such as travel, short-term disability and business interruption.
  • Fintech and virtual banking remained a key priority for multiple countries, driven by traditional financial institutions looking to integrate fintech capability into operations as well as non-financial services players tapping into the under- / un-banked population. Despite the global epidemic, fintech deals resulting from investors pursuing strategic M&A increased. In addition, we have seen an increasing number of financial institutions as well as non-financial services groups interested in developing digital banking platforms either through establishing a consortium or acquiring a local bank. We have also seen regulators are encouraging more companies to enter into virtual banking space by easing the application framework.

Contact us

Matthew Phillips

China and Hong Kong Financial Services Leader, PwC Hong Kong

Tel: +[852] 2289 2303

Chris ST Chan

Head of South Clients & Markets China Deals, PwC Hong Kong

Tel: +[852] 2289 2824

Thomas Crasti

Partner, PwC Hong Kong

Tel: +[852] 2289 6337

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