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Indonesia Leads Rout in Asian Shares

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James Bladen
James Bladen joined Alpha Southeast Asia in 2015. He has written on a wide range of issues covering capital markets, Islamic finance and M&A. He worked as a consultant in Indonesia (2013-2017) and moved to New York in 2020 where he continues to cover Southeast Asia.

Even though Asia is widely expected to emerge from the global economic crisis ahead of the West, the region’s financial-services industry may turn to slower-growth and lower-margin business models for years to come.

This was the prevailing mood we first found during a PricewaterhouseCoopers survey of senior executives in the industry in early 2009, published in a June report, “A New Playing Field” about the outlook for financial services and mergers and acquisitions in Asia.

Thanks to its attractive market, Indonesia may see more firms doing inorganic acquisitions next year.

When PricewaterhouseCoopers firms surveyed 215 senior executives across Asia, including 20 in Indonesia, early last year, we found the mood for M&A to be markedly less bullish than in 2008.

Over 2007-2008, M&A transactions in Asia had declined. The number fell from 547 to 366 deals, with values down from $120 billion to $100 billion.

A majority, 51 percent, of our survey respondents said that after the crisis they were looking more toward investing in their existing businesses than expecting to conduct M&A in the coming years.

That said, PwC noted that the largest fall-off was in the securities and capital markets sector, from $40.3 billion to $8.8 billion, while the value of banking deals increased from $69.7 billion to $74 billion.

The data also varied across countries, with a significant increase in transaction values recorded in Australia and Indonesia, while they declined sharply in Japan, South Korea, and Malaysia.

The sectoral contrast in deal activity reflects the fact that underlying fundamentals remain strong.

Our survey has found that one of the key issues why financial services firms, especially banks especially, are not going into M&A is because of pricing.

While distressed firms would seem to be a natural target amid the current level of market turmoil, only 32 percent of our respondents said they anticipate deals involving such assets.

To account for the additional risks involved, 73 percent of respondents said they would conduct additional due diligence while 62 percent said they would rely on price adjustment tools.

Indonesia is to some extent a different case, however.

Although just under half of respondents across Asia said they were looking to expand through M&A, the figure is probably higher in Indonesia. This is especially so in the banking and insurance sector, thanks to its huge market, urbanization and growing middle class.

In Indonesia, prices are still holding up even in this stressed global market.

An example is the recent acquisition of Medan-based Bank Mestika Dharma by Malaysian RHB Capital for Rp 3.2 trillion $339.2 million), or more than 3.5 times book value.

Other recent transactions include RBS selling its retail assets in Indonesia to ANZ, and earlier this year HSBC acquiring Bank Ekonomi.

These recent transactions are good indications that Indonesia is still a hot market. There is still lot of foreign investors looking at investing here.

However, in most parts of Asia organic growth seems to be the cheapest and safest form of growth and the most prudent approach at times of heightened uncertainty.

In fact, a higher than average share of institutions in Japan, Malaysia, Singapore, and Taiwan are looking to organic growth to expand.

A greater share of respondents based in large emerging markets, such as India and China, are relatively more bullish about entering new markets, suggesting a willingness to leverage the size of their balance sheets and seize opportunities.

The domestic competition factor also is likely to affect M&A activity next year.

This is a situation that is markedly different compared to when we first conducted this kind of research in 2005. Then, foreign institutions were considered the main competitive threat in the region. Now, increased competition from domestic players is viewed as the biggest challenge and the main driver of M&A activity.

While the prevailing mood of caution and patience among financial services institutions in Asia are indeed justified, to be sustainable there is also a need to incorporate the powerful underlying trends mentioned above into their long-term strategies.

Those institutions that are able to manage the multiple demands of ensuring continued organic growth without taking on greater risks will emerge stronger from the crisis.

Particularly for banks in Indonesia, for instance, they are looking to build more robust risk management systems, trying to make employees more business focused, and increasing their competitiveness.

But a lot of people realize they also need to capitalize on acquisition opportunities where they arise, at the right price.

Organic growth in isolation will not achieve critical mass in key Asian markets. PwC has seen a number of US clients expanding in Asia even during the financial crisis.

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