The strong line-up of bidders in most auctions reflects financial institutions’ interest in increasing their presence in Southeast Asia
Transactions trend in Southeast Asia (July 2012 to June 2013)
Source: EY analysis
This past quarter (April - June 2013) saw several big ticket auctions taking place across Southeast Asia, such as the auction of the stake in Bank of Ayudhya and Thai Life in Thailand, the auction for the stake in Am Life in Malaysia, as well as the auction for the stake in BTPN (Bank Tabungan Pensiunan Nasional), the Indonesian lender.
Despite certain element of economic and regulatory uncertainties across Southeast Asia (such as increasing inflation levels, impact of China’s slowdown on regional markets, etc), there remains a strong appetite in the region’s financial services sector mainly due to sustained credit growth and healthy margins. These are supported by favorable demographic conditions and rising consumer spending.
Transactions trend analysis
Our analysis of these transactions is presented in the subsequent links:
Japanese institutions continue to seek inorganic growth opportunities across Southeast Asia
In each large auction during the past quarter there has been at least one Japanese institution bidding, maintaining the trend observed over previous quarters. Japanese institutions remain bullish on Southeast Asia, and are looking at most opportunities to grown inorganically.
Regarding the banking sector, we believe that this outbound trend towards Southeast Asia is due to the rapid expansion of retail banking combined with the demand for credit from Japanese corporations operating in Southeast Asia. In the context of weak demand for loans as well as margin pressure in Japan (outstanding loans by Japan’s major banks fell for three consecutive years until December 2012), this provides an incentive for Japanese financial institutions to look towards Southeast Asia to further expand and deploy their capital.
As for the insurance sector, the high growth potential resulting from low penetration rate, higher disposable income of a growing population, and profitability of the sector, are tempting well-capitalized Japanese insurers to grow inorganically outside their home market, which is characterized by limited growth.
This trend creates direct competition with other regional institutions, and increased demand is creating upward pressure on transaction valuations. We expect this trend to maintain over the remainder of 2013, given the current strong appetite shown by Japanese institutions.
Southeast Asian institutions are keen on growing inorganically outside their home market
Southeast Asian institutions had a strong presence in the various auctions during the past quarter. This trend reflects the strength and appetite of Asian institutions to further expand regionally, becoming larger regional players capable of competing more effectively not only against regional peers but also against Western institutions.
In addition, this allows larger institutions in developed markets (such as Singapore and Malaysia) to expand into other larger and profitable markets. We have seen this in particular in the banking sector, with DBS Bank’s ambition in Indonesia, CIMB Bank in the Philippines, etc...
We expect this trend to continue over 2013 because of many remaining untapped opportunities.
Divestments from Western institutions was a key driver behind M&A transactions
In line with what we observed in prior quarters, more than half of the transactions in terms of value were associated with divestments from Western institutions: GE’s sale of their stake in Bank of Ayudhya in Thailand, ING’s sale of their stake in TMB Bank in Thailand, as well as HSBC’s sale of their term life and Group medical businesses in Singapore.
We believe that this trend is likely to continue over the rest of 2013, but may start to taper. For example, HSBC indicated that they are evaluating options with regards to their investment in Bank Ekonomi in Indonesia.
Investing in Banking and Insurance entities rather than acquiring portfolios remained the favored M&A approach
Almost all of the transactions during the past quarter were equity transactions in banks or insurance companies, maintaining the trend observed in prior quarters. There were very limited transactions involving portfolios of assets (e.g. credit portfolio; insurance in-force business, etc), in contrast with other mature markets in Asia or in the Western world.
We believe this is as a result of the following: (i) foreign institutions in Southeast Asia have adopted the approach of divesting legal entities rather than specific portfolios within their local operations; (ii) the desire for many domestic firms to partner with a strategic investor necessarily results in selling stakes in existing entities. On a going forward basis, we believe that this trend is likely to maintain, although we should see more portfolio-type transactions taking place with some large institutions analyzing their strategic core operations and likely to dispose certain non-core portfolios.
Transactions in the Asset Management space remains muted
There have been no reported transactions in the Asset Management sector during the last quarter (other than a transaction between related parties), despite the growing appetite of foreign asset managers to get a footprint in the high-growth Southeast Asian market. While most large foreign asset managers already have operations in Asia, many are also looking for inorganic growth opportunities.
We believe that there will be more opportunities going forward, considering that some smaller domestic asset managers may be looking at strategic investors to increase the size of their assets under management and enable them to reach a scale suitable to both compete against larger peers and also to obtain institutional/pension advisory mandates.
Acquisition of minority stakes is no longer seen as a problem by many investors; in various instances, the investment benefit seems to weigh favorably vis-à-vis the ownership restrictions
The majority of the transactions in terms of deal value during the last quarter involved minority interests. This is due in part to the fact that some of the transactions were driven by local firms looking f or a strategic shareholder (as opposed to exit), and also as a result of the current regulatory frameworks across Southeast Asia, which limits in various cases the foreign ownership cap at less than 50%, as seen on the table on the left.
While in the past many investors insisted on acquiring controlling stake, the current trend indicates that it remains attractive to acquire minority stakes considering the potential strong growth combined with the limited entry points in most markets across Southeast Asia.