INVESTMENT banking and deal-making head honchos believe there are pockets of opportunity and potential in the current tough operating landscape as investors are bargain hunting and business owners are restructuring.
“The various conversations that we regularly have with our clients suggest that there is appetite to pursue deals, and on the basis of this, we believe that the deal pipeline will strengthen in 2017, both in Malaysia and across the region,” says Datuk John Chong, CEO of Maybank Investment Bank and Maybank Kim Eng Group, in an email reply to The Edge.
“Though the external environment has become more challenging over the past few months, we believe there are still pockets of activity as different clients will have different risk appetites, particularly in the mergers and acquisitions (M&A) space, where clients will be looking to optimise their balance sheet and consolidate assets.”
CIMB Group Holdings Bhd group wholesale banking CEO Mak Lye Mun notes: “Within the M&A space, the volatile economic conditions caused by the global slump in commodity prices and the weakening of currencies gave corporates opportunities to identify quality asset targets with attractive valuations. Driven by the hot money flow under the expansionary policies in Japan and China, regional M&A activities picked up in 2016. According to (financial markets platform) Dealogic, Malaysia’s M&A deal value was 30% higher at RM84.8 billion in 2016 compared with RM65.4 billion in 2015. This momentum is expected to sustain going into 2017.
“M&A in Asean is more broad-based now than ever before, with corporates continuing to be on the lookout for business diversification and cross-border opportunities. Malaysia is seeing a rising trend in business consolidation,” he says.
Indeed, statistics show that there was some improvement in deal flow values and pipelines this year. Mergermarket’s data shows that M&A rose marginally in Malaysia to US$7.54 billion this year compared with US$7.14 billion last year. They dropped significantly in 2015 to US$7.14 billion from US$11.73 billion in 2014.
The number of deals rose to 93 this year from 77 last year. In 2014, there were 93 deals as well.
Astramina Advisory managing director Wong Muh Rong says there will be more owner-driven M&A transactions next year, citing asset injections for consolidation. “This is a good time for restructuring and reorganisation, especially when the market is not doing well. Potentially, (there will be) more back-door listings or reverse-takeover exercises … another form of M&A where entrepreneurs opt for a more prudent route to inject or list their assets. Quite a number of foreign corporates are also on the lookout (for deals). Potentially, we can see better pricing offers from foreigners (who want) to participate in some infrastructure assets or properties,” she says.
Maybank’s Chong admits that one of the biggest challenges is the shrinking deal volume and fees.
Nevertheless, he believes that Maybank IB’s diversification across products and geographies, as well as its involvement in the pockets of activities that come to fruition, will help the group weather the challenging environment.
“As a business strategy, we will continue to focus on the Asean region as this is where our expertise lies, and we have built up a strong franchise since the merger with Kim Eng in 2011. We see the recent cutbacks by several regional and global banks in the region as an opportunity for us to strengthen our presence and penetrate deeper into the Asean market,” Chong says.
“We believe Asean still has a lot of untapped opportunities and while the overall GDP growth slowed down a little in 2016, we expect it to bottom out early next year and growth to accelerate thereafter. So, we expect markets to improve, but there are still a number of external factors that may affect the market, such as the new US President’s policies, Brexit, elections in EU countries next year and the US Federal Reserve’s decision on interest rates,” he adds.
In Southeast Asia, Malaysia was the second largest country in terms of M&A value for the 2011 to 3Q2016 period, registering US$65.973 billion from 501 deals, according to Mergermarket data. Singapore topped the list with 647 M&A deals worth US$125.852 billion and in third place was Thailand, with 253 deals worth US$51.924 billion.
“In the region’s M&A market, deal volumes have remained generally steady since 2011, with a small spike in 2014. Meanwhile, the region’s deal values have reflected a downward trajectory since 2013,” Mergermarket notes in its Dec 15 report, Southeast Asia M&A: Trends shaping the region.
Mergermarket also anticipates more deal flows going into the region following the launch of the Asean Economic Community late last year.
In a Dec 14 collaborative report with Donnelley Financial Solutions, Taking Center Stage: M&A in Asia-Pacific, Mergermarket states, “As the Southeast Asian economies continue to integrate, frontier markets in the region are expected to yield a range of interesting and accessible targets, drawing buyers from outbound focused countries, such as Japan, seeking to establish themselves in the region.”
CIMB’s Mak observes that across the region, M&A deals have been selectively carried out due to the challenging market conditions and this will likely be the backdrop of CIMB’s IB business going into FY2017. “On DCM (debt capital markets) in Malaysia, CIMB expects primary ringgit-denominated corporate bond offerings in 2017 to be led by debt raising for infrastructure-related projects, banks raising fresh capital, and private companies issuing financing for corporate expansion to hit between RM80 billion and RM90 billion,” he says.
“The outlook for Malaysian IPOs (initial public offerings) in 2017 could be affected by the US government’s policies on trade and interest rate hikes, which may impact the emerging markets; institutional investors being more likely to channel more funds to the developed markets than emerging markets given the post-US election equity markets rally; and concern over weak market sentiments and volatility. We may continue to see deferment of potential listings,” he says.
As it enters the new year, CIMB’s strategy in wholesale banking will focus on five areas, shares Mak. These are clients, de-risking, productivity and cost, asset quality and provisioning, and people. “Part of the improvement in PBT (profit before tax) in 9M2016 was contributed by the group’s continuous efforts to simplify the business to bring down costs. The group’s regional wholesale banking targets a 40% cost-to-income ratio (CIR) by 2018/19 (it currently stands at about 45%). The planned signing of the 50:50 joint venture with China Galaxy International Financial Holdings Ltd (targeted for January 2017) will also help bring CIR down for the wholesale business … by about 100 basis points,” he says.
CIMB’s wholesale banking segment comprises investment banking, corporate banking, treasury and markets, transaction banking, equities and private banking. Profit before tax in the segment grew 4.8% year on year to RM1.34 billion for the nine months ended Sept 30, 2016, contributed by treasury and markets and supported by contributions from the debt and equity mandates.
The RM1.34 billion income was derived from corporate banking (RM572 million), treasury and markets (RM737 million) and investment banking (RM32 million).
In CIMB’s investment banking business, earnings returned to the black in 9M2016, registering a RM32 million profit from the RM51 million loss in the previous corresponding period.
Meanwhile, Maybank’s Chong says Maybank IB’s strategy moving forward is to continue to build up its investment banking and advisory teams to take advantage of the infrastructure boom in Asean as well as capitalise on its strength in Islamic finance to promote Islamic solutions.
“We will deepen and strengthen our relationships in Asean as regional and global banks pull out. We will also leverage Maybank’s footprint and step up cross-collaboration efforts to uncover and realise hidden opportunities,” he says.
He adds that Maybank IB will also provide connectivity to Hong Kong/China and North Asia via strategic collaborations such as the ones with Taiwan’s Cathay Securities Corp, Japan’s Mizuho Bank, Ltd, and South Korea’s Daishin Securities.
For 9M2016 ended Sept 30, 2016, Maybank IB’s profit before tax grew 12.3% y-o-y to RM194.8 million from RM173.4 million a year earlier.
The increase was driven by factors that include higher other operating income of RM61.5 million, higher net interest income and lower allowance for impairment losses on loans, advances, financing and other debts of RM6.6 million.