The subprime crisis has cooled mergers and acquisitions (M&As) in the Asian financial services sector substantially, causing transaction values to drop 40 percent in the first quarter of 2008, according to a survey commissioned by accounting firm PricewaterhouseCoopers (PwC).

Christopher Chan, the transactions partner of PwC said that in the first quarter, the transaction value of M&As in Asia was $13.5 billion, compared with $20 billion last year.

The accounting firm attributed the dip in M&A volumes to the lack of large transactions in the banking sector after the subprime crisis wreaked havoc on the global capital markets, forcing many deals to be deferred or postponed.

"However, it is becoming clear that the subprime impact on China isn't that bad. So we expect talks to pick up again later on this year," said Matthew Philips, head of PwC financial services M&A practice on the mainland.

Yet, according to a survey conducted by the firm, a majority of respondents remain optimistic about M&A prospects in the future, especially in Asia. The survey, which included 281 senior executives, found that more than 44 percent of the respondents believe the M&A activity level to climb this year in spite of the mortgage crisis.

"It is in the view of some respondents that perhaps some opportunities might arise that would not have otherwise been there if not for subprime," Philips said.

Although the head of transaction services said that there is no evidence that mega merger deals are being postponed, he did admit that the pace of such deals going forward might be slower.

Also, the power dynamics of the M&A landscape may also be shifting to favor regional players over Western institutions. "They can potentially take advantage of the strength of their balance sheets." Philips said.

Asia remains hot spot

With the gross domestic product booming at an unprecedented pace, and the emergence of a large affluent class, PwC said that Asia remains the heart of M&A activities.

Findings of the PwC survey revealed an optimistic aura around Asian M&As, with 40 percent of participating respondents believing their institutions will undergo such activities this year.

Despite the monetary tightening on the mainland, the accounting firm said that financial services remain the hottest sector for M&As, especially in retail banking, as cash rich Asian consumers save and invest more.

"The principle merger targets will be securities firms, asset managers and private banks," PwC's Chan said, as the increasingly blurry boundaries between banking and wealth management industry creates more interests in M&A deals.

Small-to-medium sized commercial banks on the mainland will also seek strategic partnerships overseas, Chan said.

He said many city commercial banks are still at the learning phase in searching for expertise from overseas firms before they list.

PwC said that at least a half dozen mainland city commercial banks have plans to list.

(HK Edition 05/14/2008 page2)