The global credit crisis could actually increase the volume of M&A deals in Asia's financial sector and China is likely to be the most active area this year, according to a recent report.

The findings are based on a survey of 281 senior executives working in Asian financial institutions. The Economist Intelligence Unit, on behalf of PricewaterhouseCoopers (PwC), conducted the survey in March 2008, marking PwC's third report on financial services M&A.

According to the findings, although the credit crunch has led to market volatility and put a halt on larger financial service deals in the first quarter of 2008 throughout Asia, 44 percent of respondents believed that the credit crisis could actually increase the volume of M&A deals in Asia.

As for the main drivers of the increases, respondents believed that tightening liquidity in some Asian markets will create opportunities, for example, the potential sellers may reconsider the deals that may previously have been unattractive.

Meanwhile, banks need to liquidate some holdings to raise capital. Slowing growth in the US will also make the debt-burdened institutions ripe to be taken over.

M&A activities involving Asian financial institutions were at unprecedented levels last year, with the deals amounting to $105.9 billion, up $41.4 billion or 64 percent over 2006. Life insurance was the busiest sector with 83 percent of life insurers surveyed having completed an M&A deal in the past three years.

The report revealed that about three-quarter of respondents believed their firms had been involved in an M&A deal in the past three years. The figure rises to 86 percent among Chinese institutions, while activities also picked up in India with 66 percent of Indian respondents saying they were involved in an M&A deal in the past three years.

Matthew Phillips, head of PwC financial services M&A practice in China, said: "If there is any doubt that the balance of financial power is swinging toward Asia, one only has to look at the Financial Times Global 500 index. Four Chinese financial services companies - ICBC, China Life Insurance, China Construction Bank and Bank of China - are in the top 21 global companies by market capitalization."

In 2007, Japan topped the M&A list, with $36.2 billion worth of deals, more than double the amount recorded in 2006. China was the second most active country with deal volumes at $16.2 billion, up from $11 billion in 2006.

Looking ahead, China seems to be the most active area with 48 percent of those surveyed saying they would conduct M&As in China in the next five years. Half of Chinese companies believe they will undertake significant M&A deals this year and 71 percent in the next five years.

By contrast, the outlook for Japan is subdued, with just 16 percent of the respondents considering an M&A deal in Japan in the next five years. A quarter of Japan-based respondents said lack of capital was the main block.

"The total M&As in China's financial service industry may be shrinking this year, but the total quantity of deals will be the same as last year, or perhaps even more," said Nelson Lou, the transactions partner with PwC.

PwC said that strong and steady GDP growth and the continued emergence of a wealthy consumer class in Asia have created a fertile environment for further M&A activity in financial services. Nearly four out of 10 institutions said they will undergo significant M&A activities this year and 70 percent believe they will be involved in M&As over the next five years.

The survey also suggests that retail banking is likely to see the most M&A activities. Nearly half of all retail banks said they expect to undergo significant M&A deals in the next year and more than three-quarters said they will be involved in M&As in the next five years.

"In the past few years, the M&A activities were mainly related to commercial banks. With consumer saving and investing more of their considerable accumulated wealth, the merger target is likely to shift to retail operations," said Lou.

PwC also predicted that securities firms, asset management companies and private banks will be the principal merger targets in the coming five years.

Three out of the top 10 financial service transactions involved trust companies, highlighting a significant interest in this sector.

As for the obstacles for M&A ambitions, financial service firms still see regulation as the biggest limitation, but the number citing regulation as a major barrier has progressively fallen since the first survey in 2005.

As China's regulators are gradually relaxing the boundaries between banks, insurers and asset managers and with the introduction of innovative tools such as index futures, margin lending and stock lending, PwC believes these favorable policies may act as a spur for future M&A activity.

(China Daily June 6, 2008)