Analysts: Jennifer Liu (McGill University), Martin Dai (Western University)
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Financial Services Industry
2020 at a Glance
Since APAC was the first region to be hit by the effects of COVID-19 at the beginning of 2020, we have been able to witness the significant impacts that the pandemic has had on many industries - specifically the Financial Services Industry. From global interest rates reaching historical lows to withdrawn and delayed M&A deals driven by uncertainties, the effects of COVID-19 can be pronounced. Within Q3-Q4 of 2020, M&A activity in the Financials Services industry across the region started following a relatively solid recovery, showing indications of growth despite some market volatility, with the rebound characterized by deal volumes in the latter half of the year that rose by 13% to (USD) $1.3 trillion. As the overall economy has begun to slowly navigate its way towards a post-COVID era, let’s take a look at some of the major activities within the financial services industry.
The resurgence of M&A Activity
Despite the many unprecedented events brought by the global outbreak, positive news can be extracted from Q3 of 2020. During this period, investment banking fees within the APAC region took (USD) $21 billion of a global fee haul of (USD) $91 billion, up nearly 14% from the same quarter in 2019 due to the rapid rise in debt and equity financing activity - fees in the region can be mainly attributed by China where they rose 35% in 2020.
Private-equity backed M&A activity also continued to remain relatively active in the latter half of 2020 as firms were able to buy many companies and assets at lower valuations due to distressed situations and uncertainties on the lasting effects of COVID-19. Instances of private equity transactions by funds can include KKR’s (USD) $754 million stake in one of India’s biggest retailer companies, Reliance Industries Ltd, this past September. An interesting fact to take into account is that KKR’s, KKR Asian Fund IV also beat the fundraising record for private equity funds this past year with dry powder growing by 22% from the previous year and a total of (USD) $13.1 billion raised in secured commitments for capital funding. A general trend in M&A activity goes to show that private equity firms will continue to remain heavily involved in divestitures and acquisitions looking onwards, with an emphasis towards actively engaged activity in sectors adversely impacted by COVID-19 and companies with business models experiencing significant rapid evolution, taking advantage of the opportunities for distressed asset acquisitions.
Awareness and Emphasis on ESGs
As a growing number of businesses and investors are starting to place a strong emphasis towards satisfying ESG objectives, the landscape for assessing M&A deals and valuations have taken a shift towards a new direction. One of the most common tactics for companies to achieve ESG commitments are through credit issuances of bonds focused towards funding sustainable initiatives. Although 2020 was categorized by a region-wide decline in ESG bond issuances - 12% decline from previous year, the effect of this seems to be temporary as the declination in green debt sales was mainly attributed by China’s shift towards social note offerings to combat the effects of COVID-19. Pledges given towards achieving zero-net emissions by several countries across the APAC region have furthermore pushed many existing companies to curb their carbon dioxide emissions at a growing pace. Last September, China’s president announced goals to become a net-zero-emission country by 2060, followed by announcements from Japan and South Korea to become carbon neutral by 2060 in October. As the focus on corporate social responsibility (CSR) by companies and overall initiatives focused towards sustainable growth continues to progress, these changes will be bound to affect potential synergies and acquisitions in the M&A environment. The development and rollout of new ESG structures including green interest-rate swaps and sustainability-linked notes also goes to show the further expansion and flexibility of potential ESG financing options.
Growth in Digital Transformation
One of the emerging trends that COVID-19 has accelerated is the growing digitization of banking. Digital leaders in Asia’s banking industry are forecasted to deliver higher returns of 4-5% ROE by the year of 2025 in comparison to institutions that miss out on emerging growth opportunities as they aren’t on pace with adapting digitization into their business operations. As many financial institutions like banks have experienced steady growth leading up to 2020, the pandemic has gone on to distinguish the difference between APAC region’s digital laggards and leaders. As low interest rate policies across the wider region are expected to remain until 2023, technological adoptions will prove to be of great significance for banks in order to combat the emerging challenges placed against their infrastructure. Traditional banks looking to pursue capitalizing in underserved markets also face troubles imposed by many fintech players such as their offerings of Super Apps - portals that combine banking and other services onto one platform. Across countries like Vietnam where more than >70% of the population is unbanked or under-banked, banking penetration is significantly low, leading to potential opportunities for individual fin-tech and digital banking players to gather significant market share. Looking towards another perspective, this general trend can also hint towards the interest in potential acquisitions/mergers surrounding the fin-tech space for companies with high-growth. In regards to other M&A opportunities, the integration of machine learning and artificial intelligence will be able to support investment banks and other financial institutions in gathering prediction models for deals to identify suitable targets to chase after
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