HONG KONG Bank M&A in Asia is set to accelerate over the coming months as small and inefficient lenders in the region look to attain scale and drive shareholder returns.
While domestic consolidation is seen as the big driver, several foreign banks, lured by strong economic growth, are also sniffing around for opportunities. But cross-border deal activity will likely be limited by the foreign ownership restrictions in many countries in the region.
"There is a strong rationale for bank consolidation to occur in the region, driven by the cost efficiencies and revenue benefits from complementary capabilities and customers," said Willard McLane, head of financial institutions group (FIG) at Morgan Stanley.
An estimated $16 billion worth of live or planned deals between banks are being worked in the region, bankers say, which could make FIG the most active sector.
Prominent bank deals in the works include the South Korean government's planned $6 billion stake sale in Woori Financial Holdings Co Ltd 053000.KS.
"Right now we are in a reasonably stable environment with low financing, and regional stock valuations are generally moderate. All that makes it a little bit easier to get deals done," said McLane, who advised on six FIG deals this year.
But a $7 billion planned takeover of Malaysian lender RHB Capital (RHBC.KL) received a setback on Thursday after two potential bidders decided to walk away.
Still, bankers expect the suitors to return later in the year, for what could be Asia's fourth-biggest banking M&A ever.
Overall, dealmaking in Asia grew at a healthy pace in the first half of 2011, driven largely by the material and industrial sectors and showing buyers were unfazed by slowing economic growth in China and India and rising interest rates in many parts of Asia.
Some $312 billion worth of takeovers were announced in the first half, up 28 percent from a year ago, according to Thomson Reuters data.
The volume of pulled deals fell by nearly half from a year ago to $48 billion, underscoring improved sentiment in the M&A market.
Goldman Sachs (GS.N) topped the league table, followed by Morgan Stanley (MS.N) and JPMorgan (JPM.N), with the top three advisers accounting for about half of the market.
Swiss bank UBS AG UBSN.VX earned the most fees, pocketing $151 million for completed transactions, according to Thomson Reuters/Freeman Consulting Co estimates, followed by Credit Suisse CSGN.VX.
Chinese and Indian companies scouring the world for resource assets has been a major M&A theme in Asia for the past few years. Bankers predict an increase in inbound M&A over the coming months.
"We are seeing some divergence away from the traditional themes in Asia, with inbound deals from sectors like consumer and industrials beginning to pick up," said Stephen Gore, head of Asia M&A at UBS.
French engineering group Alstom's (ALSO.PA) joint venture with Shanghai Electric Group (2727.HK) -- a deal that UBS worked on -- is the type of transactions that could follow more in the future, Gore added.
Of the $171 billion of total cross-border M&A launched in the first half, about 45 percent was inbound, according to Thomson Reuters data.
Bankers say the increase in inbound deals are reflected in higher public offers, whereby listed companies are targeted by buyout firms or strategic buyers.
Gore said 30 percent of his bank's top 20 deals are in the form of public takeovers. "This is a large number, particularly for Asia where M&A is more often limited to purchase of assets and private companies," he added.
Cashed-up Western companies are keen to get exposure to Chinese consumers, but deals are hard to come by in China. Dealmaking in China is also limited by lack of sellers, as many Chinese entrepreneurs are relatively young.
Richard Campbell-Breeden, head of M&A Asia ex-Japan at Goldman Sachs, who worked on Yum Brands Inc's (YUM.N) takeover of Chinese restaurant chain Little Sheep (0968.HK), said Western companies are looking to buy Hong Kong-listed companies as a way to get exposure to Chinese consumer plays.
"Hotel, gaming and leisure are the sectors where people see a way of getting exposure to Asian consumers," Campbell-Breeden added.
(Editing by Steve Orlofsky)