This article first appeared in The Edge Malaysia Weekly on February 27, 2023 - March 5, 2023

MORE banks in Southeast Asia (SEA) are likely to turn to mergers and acquisitions (M&A) this year to help them navigate a rapidly changing industry in a downturn, says Bain & Co.

“The three types of deals we expect to see by banks include scale deals for consolidation, scope deals to focus on the core, and deals for a new growth engine,” Emmanuel Coucke, a Bain  partner based in Kuala Lumpur, tells The Edge.

According to him, strategic M&A deal value in the banking and finance industry in SEA last year fell 54.1% to US$6.53 billion (RM28.94 billion) from US$14.24 billion in 2021, while deal volume declined to 45 from 53. Banking and finance deals accounted for 94% of the total deal value within the financial services industry (US$6.96 billion) in SEA last year.

In Malaysia, banking and finance M&A deal value fell by 20.1% to US$90.8 million in 2022 from US$113.7 million in 2021, while deal volume tumbled to three from 14. Coucke declined to comment on specific deals.

There were no M&As in Malaysia that resulted in bank mergers last year; instead, banks undertook strategic moves to sell certain non-core or sub-scale assets in order to focus on their core businesses.

One of the larger M&A deals last year was Affin Bank Bhd’s divestment of a 63% stake in its asset management firm, Affin Hwang Asset Management Bhd, to private equity group CVC Capital Partners for RM1.42 billion. The deal was completed on July 29.

Another significant transaction concluded in late July was AMMB Holdings Bhd’s (AmBank) sale of its general insurance company AmGeneral Insurance Bhd (AGIB) to Liberty Insurance Bhd for RM2.29 billion in cash and shares. AGIB and Liberty will eventually merge and AmBank will end up having a 30% stake in the enlarged entity, which is set to become the country’s largest motor insurer.

Apart from that, Singapore-based banking group United Overseas Bank Ltd completed its acquisition of Citigroup’s consumer banking businesses in Malaysia and Thailand last November. The deal gave UOB access to Citigroup’s unsecured and secured lending portfolios, wealth management and retail deposit businesses.

This year, one of the deals that will be closely watched for possible completion is Malaysia Building Society Bhd’s (MBSB) acquisition of Malaysian Industrial Development Finance Bhd (MIDF). Main Market-listed MBSB on Oct 21 last year said that it had applied to Bank Negara Malaysia for approval to acquire MIDF to form a universal Islamic banking group. So far, there has been no development.

Meanwhile, industry experts do not expect to see in Malaysia an uptick in M&As that result in bank mergers this year.

“My take is, if you look at the banks’ performance today, I think there is very little pressure to merge. And if you look at the valuations, a number of banks are seeing their NTA (net tangible assets) creep back up. I think there is a return to premium pricing. Hence, I find, while the trends in the industry are changing, the expectation gap between a potential buyer and seller still remains. In fact, it’s probably growing,” a partner from a global professional services firm, which advises clients on M&A, tells The Edge.

On a global basis, more banks will likely seek M&A to deliver on strategies that will better position them as the industry continues to rapidly evolve, says Bain in its Global M&A report last month.

“Higher interest rates will bolster top-line growth for healthy banks while a downturn could make it necessary for less sturdy banks to merge or sell. In Europe and other regions where banking is fragmented, regulators are showing support for scale deals.

“As digital options emerge and customer needs change, banks are determining where they want to play and how they want to compete. They are looking to sell non-core assets and buy new capabilities to deliver their portfolio strategy faster, cheaper, and more effectively than they could on their own,” it says.

Meanwhile, PwC believes that the M&A market will remain difficult in 2023; however, the financial services sector will afford dealmakers many opportunities to execute on their strategic goals, albeit in a more disciplined and cautious manner.

One of the areas that it thinks will be an M&A hotspot in the next six to 12 months is financial technology, or fintech.

“Corporate and private equity investors remain interested in fintech companies as part of their digital transformation or investment strategy. However, fintechs are also under pressure given the current market environment, including inflation and interest rate developments, and have lost value compared to last year. This might lead to some opportunistic M&A among large banks, which may be able to acquire attractive assets at lower valuations than previously possible,” it says in its 2023 outlook report on global M&A trends in financial services.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.