Stadler on bank M&A

ABN AMRO?s financial institutions group managing director, Mark Stadler talks about Asia?s hottest M&A sector.
Is Taiwan going to be the key market for FIG M&A?

There’s a lot of interest. More particularly from the seller side. Many of the new bank owners  recognise that having a bank as part of an industrial group holding company structure isn’t viable longer term and they all recognise they need to sell or at least reduce their holdings .  

Certainly there are no shortage of banks that are willing to take on foreign partners. Clearly there are a lot of issues about asset quality, but you do have foreign buyers looking to enter the PRC either from Hong Kong or Taiwan. We see more interest at the moment from people wanting to use Taiwan as the springboard. There’s also a valuation issue there. Hong Kong banks are relatively expensive right now, Taiwan banks are not. You have differences in asset quality but that is an addressable issue.

Why is it that Taiwan is an industrial powerhouse, but it hasn’t produced any banks of similar quality?

Government intervention is part of the reason. Savings have been mobilized to develop the industrial machine. The state controlled bank were built along Korean lines, and the big industrial groups were allowed to form their own banks. And there was a tendency to service a very local client base, and follow them – perhaps on a trade finance basis – and it’s a very fragmented system still.

There is a general trend that partnership with a foreign bank is the way forward.

What is ABN AMROs attitude to buying a bank in Taiwan?

Taiwan is a market where we do want to be, and where we already have a very successful consumer business.

Would you be allowed to buy a bank in Taiwan?

The impending changes in Taiwanese legislation will allow us to do that. We’re very confident that the legislative rollout is favourable for foreigners. We have a sizeable operation there already and we can use that to a certain extent as acquisition currency.

Is the Taiwanese government owned about too much foreign control of the banking sector?

I don’t believe so. The impression we’ve got is that the regulators view the introduction of new products and more of a global reach being good for the system.

Is the preference to own the bank outright?

It depends. Each on its merits. Clearly everyone would like a majority, but if you can’t do that at the outset and there are steps for increasing the stake over time, people would consider that. It’s difficult if you get 25% and there is no path to take it beyond that. That is an issue in the PRC from what we see. Strategic partnerships are being invited to take 25%, although where this will lead is a little muddy. Experience will tell you if you have 25% you also get all the problems.

We are aware of a couple of situations where partnerships are being looked for at that level. The legislation isn’t there but banks are expecting that’s the way the sector will open.

These are the rumours we’re hearing from the supranationals who are already invested there. It will probably be a gradual process like in India. But the Chinese recognise that knowledge-transfer will be important.

You were saying that Taiwanese banks are cheaper than Hong Kong banks.

Yes, you have not seen their shares bid up to the same degree as in Hong Kong.

Hong Kong banks like HKCB has nudged three time book at one point. But two time plus is not unusual. And in some ways that is going to be a barrier to further consolidation. It is expensive.

Are you hearing that the most interest will come from the mainland banks that want to buy into Hong Kong?

They were certainly evident last year. It would make a lot of sense for them. They bring a customer base.

This year has been a good year for FIG.


Will the Singapore banks continue to be the most aggressive in Hong Kong?

My view is a bit more personal. I believe these valuations will come off. Then there will be more buying. When Bank of China comes to the market, institutions will offload the second tier stocks in order to get a weighting in Bank of China. All those second tier banks will then see their valuations fall, and that will then allow outside groups to come in. At the moment, the valuations are slightly artificial.

What would be the level that would make it interesting to buy a Hong Kong bank?

Below two times book. Sub-two is where you will get interest.

Do you think the Australian banks will ever show any interest in coming into Asia?

That’s a very good question. They don’t, which doesn’t seem – in my view – hugely logical. NAB is sitting on a huge cashpile following the sale of Michigan National, and is gearing itself around a UK-based strategy – which is beginning to shrink as the mergers occur there. It seems to me that Asia is their backdoor. CBA too. But they seem to be quite risk averse and reluctant to dilute the quality of the portfolio. They also maybe see organic growth opportunities in Australia.

European banks on the other hand are saying where do we go now? And they are looking at Asia. It presents scale and value opportunities.

Would it make more sense for a European bank to just buy Standard Chartered?

The market has the view that there is a degree of inevitability about the fact that it will be sold. Standard Chartered has built an exceptionally good business. However, I don’t know if anyone is looking at that.

By Asian standards that would be a $25 billion megadeal.

In that respect you have to ask whether a European bank would take that amount of risk, and which European would do a deal of that scale. It’s more in the Citigroup league in terms of affordability. $25 billion is a chunky deal for any European to consider. It might limit you to a big US buyer.

The real issue is: can you sell Asia to shareholders? You still have a series of perception issues in Europe about Asia which are very difficult to overcome. It is still seen as a region rocked by instability, and that restructuring seems to be going on without an endgame in sight.  When we do cross-border marketing into Europe or the US, there is extraordinary limit on the number of people who know what is going on in Asia and where the opportunities are. Some people have gridlocked themselves into the Asian crisis mentality.

But if you take the time to do the homework… regulators have changed out here beyond all recognition and transparency has improved. So there are some good opportunities.

The new Basel capital accords present meaningful opportunities for buyers because you are going to need to bring in all the skillsets of managing risk at all levels, which a lot of banks out here reckon they don’t have.

The insurers are much more developed in terms of thinking about Asia as a growth market. Just look at Prudential UK which has a main board member based in Hong Kong. That’s a real commitment. Allianz has a big growth strategy for Asia. They are saying there really is the demographic support and are making big bets in this market. Insurers are far more developed in thinking about Asia as the market for growth.

Is that because insurers naturally take a longer term view?

Probably. And this is the last of the growth markets. We see many mid-scale insurers looking at Asia too. They see it as the sweet point of the curve – slightly ageing populations, clearly no government provision for old age, rising incomes, exceptionally high savings rates, and government recognition that insurance can meaningfully help the development of your capital market. Insurers are looking to expand their equity book. When the Malaysians put out their masterplan in February, they clearly said insurance is the driver of a local capital market.

And getting back to Singapore. What will drive further acquisitions from there?

When the Singaporeans finally dispose of all their non-bank holdings they’re going to end up with exceptional capital ratios. They can be regional engines, and they do have regional strategies.

This could be as much as $2 billion? It’s all property primarily. It pushes some of these tier one ratios into the mid-20s. If you sit on that amount of capital, it will send your returns on equity into single digits.

In July last year, the government said these stakes must be sold within three years. The unwinds are going to take a long time. There are very complex webs of companies and family shareholders will want to make sure they don’t lose out. It will probably take three years to get done.

Could it be driven by securitization of these assets?

There are countless prime properties they own where they could do single asset securitizations and still reep some of the returns.

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