Why Southeast Asia is a hotspot for financial services M&As

Despite the global economic and regional political uncertainty leading to a cautious approach towards M&As, the financial services sector in Southeast Asia’s (SEA) developing markets has seen buoyant activity. In H1 2013, several big-ticket transactions took place.

These include the sale of 40% stake in mid-size Indonesian insurer PT Panin Life to Dai-Ichi Life Insurance for US$338m; the 40% stake acquisition of Indonesia’s BTPN Bank by SMBC Corporation for US$1.2b; as well as the 15% stake acquisition of Thai Life by Meiji Yasuda for US$700m.

The strong line-up of bidders underlines the financial institutions’ interest in the emerging markets of SEA. And that is expected to continue.

The desire for growth is driving the buoyant M&A activity in the region’s financial services sector. Large foreign banks and insurers are looking for expansion opportunities outside their saturated and stagnant market; mid-sized regional players are seeking to spread their reach across neighboring countries; and small institutions in developing markets are pursuing partnerships with global institutions to grow and enhance shareholders’ value.

A common denominator in these pursuits is a favorable demographic profile in the host market that supports sustainable growth in the financial services sector.

A favorable demographic profile is typically characterized by a large population of above 40m, comprising a considerable young middle-class with disposable income. Such a demographic profile will be able to support domestic demand and economic growth, with a reduced dependency on exports to developed countries.

Such a conducive demographic profile is generally found in developing countries. Some examples in SEA allude to this: Vietnam’s banking sector saw an M&A boom until recent years; the strong appetite shown by foreign banks and insurers towards Indonesia; and the recent explosion in the number of representative offices of banks and insurance companies in Myanmar.

The financial services sector in developing markets are generally characterized by a low penetration rate and simplicity of product offering, therefore presenting a significant scope for growth.

Yet, it pays to be mindful of the potential challenges.

For example, the large number of bidders has had a direct impact on valuation. The valuation for banking and insurance assets in some developing markets can be surprising to many, and perhaps even unheard of based on experiences in developed markets.

This is because in developing markets, valuations take into consideration future growth outlook, which in some cases are deemed to be aggressive.

Besides the growth prospect of developing markets, another important aspect to consider is the political, regulatory, economic and legal risks associated with such markets.

For example, a high-growth market may experience inflationary pressure and "bubble" in the financial system. Regulatory changes may limit foreign ownership.

Also, the business and corporate governance practices in developing markets may not be on par with those of the investing financial services organization, which may result in significant new investment required to level up the businesses of the acquired companies.

Fundamentally, striking the right balance between potential growth and the associated risks is an important part of any M&A plans. For now, it is clear that investors remain eagle-eyed on the opportunities in Southeast Asia, a new frontier for growth.

The writer is Patrick Hanna, Financial Services Partner at Ernst & Young Solutions LLP.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.