European Merger Frenzy: And What About Asia?

European Merger Frenzy: And What About Asia?

Talk about mergers and acquisitions in banking is gathering pace. Singapore's two top banks may also become potential targets for a merger or takeover.

The most recent example of increasing speculation about a consolidation in banking are negotiations between Italy’s Unicredit and French rival Société Générale as reported first by the «Financial Times» (behind paywall).

The urge of big banks to create pan-European champions in their industry is all the more apparent as investment banking has become more expensive due to increasing regulatory demands. Size therefore has become a major factor of survival.

Rising Costs, Smaller Margins

A second important aspect are rising costs in the industry, while at the same time margins have been squeezed. Adding up the size of two major banks may bring important synergies, the big players seem to consider. And some say that this is how banking will fend off new competitors from the fledgling fintech industry.

Last but not least, there are U.S. competitors to contend with. J.P. Morgan and Citigroup for instance have a better capital base than their European rivals and are thus better equipped to fight for market share. In global equity trading for instance, the four largest actors all are U.S.-based companies.

Asian Watches Tick Differently

In Asia by contrast, banks are in a different business cycle. Their approach seems to entail the strategy of catching the low hanging fruit approach. As European and U.S. banks have struggled to achieve scale and some decided to pack their bags as a consequence, the cash-rich local rivals had many easy targets to expand their business locally.

With declining populations and saturated domestic markets, banks from North Asia are active hunting acquisitions in Southeast Asia. Companies in both Indonesia and Vietnam have attracted strong interest from Japanese and Korean rivals. The Industrial Bank of Korea (IBK) for instance acquired four fifths of Indonesia-listed Bank Agris in February 2018. IBK also acquired a 72 percent stake in a second Indonesian bank, Jakarta-based Bank Mitraniaga.

Still, there's a national aspect to consider with any major bank deal in Asia – as is probably the case elsewhere too. Five years ago, Singapore’s DBS lined up Indonesia’s PT Bank Danamon in a $7.2 billion acquisition.

Chinese Muscle

However, the Indonesian government wasn't comfortable with a bank from wealthy neighbor Singapore owning an important domestic bank. The deal got stuck in regulatory limbo for months, with the Indonesian central bank refusing to sanction it, before DBS in 2013 finally pulled the plug on the proposed acquisition.

They haven't met any competition from eager Chinese buyers yet. Mainland Chinese banks may be dominating the charts of the world's biggest banks by assets, but they have not yet flexed their considerable muscles in the region. So far, they have preferred to concentrate on their sizeable domestic businesses and they may also find it hard from a geopolitical and security point of view to acquire a major foreign bank.