"Going forward, we expect them [Thai banks] to seek growth through M&A and expand regionally regardless of their sitting on the buy or sell side, bucking the overall downward trend in global banking M&A," Sira Intarakumthornchai, CEO of PwC Thailand, said yesterday.

The top local lenders, already strong in the domestic market with a share of 70-80 per cent of the industry, are likely to look at going international as their next logical step going forward. That said, strengthening local operations while also thinking regionally would be among the key challenges for the banking industry in a changing global economic landscape, he said.

"When we look at countries like Thailand, we remain an attractive banking system because of relatively low credit penetration, sound and resilient economic growth and expanding middle class. Most major Thai banks are well capitalised and have sound loss-absorption capacities."

Larger Thai corporations have been pursuing regional expansion aggressively for a few years, and local medium-sized businesses are starting to follow suit. Large Thai banks have also followed, to support their domestic customers, and are starting to get a better sense of what they might be able to do in a regional market.

For small and medium-sized local banks, the priority is to strengthen their domestic business to cope with stronger competition. Organisational restructuring and M&A deals were part of that process last year. Expansion into neighbouring markets should be the banks' next step as part of a longer-term plan to prepare for the Asean Economic Community (AEC) in 2016. Southeast Asian banks need to be aware of how global economic forces could affect the markets in which they operate. They are also looking forward to greater opportunities for both the real and financial sectors with the formation of the AEC.

PwC's paper on the "Brave new world: New frontiers in banking M&A" showed that global banking M&A transactions continue to decline faster than all-sector M&A, and will record another weak year in 2012, with the total value of completed banking deals globally falling by 37 per cent during the first 10 months of last year, compared with a drop of 20 per cent in all-sector global M&A.

In this regard, Asia-Pacific is expected to lead the world as the most active region for banking M&A this year and beyond, underpinned by rapid economic expansion, mounting middle-class demand for banking products and a growing high-net-worth segment.

Siva said domestic deals will continue to drive M&A activities, as banks in the burgeoning region respond to rising competition and the need for greater operational and capital efficiency. This comes despite the recent years' decline in M&A in a global banking industry hit by prolonged debt woes - a shift no longer seen as a "cyclical downturn" but rather representing "a more permanently changed" economic and regulatory environment.

"The sovereign debt crisis in Europe will continue to affect banking M&A for as long as it persists," he said. "The political and economic uncertainty stemming from the eurozone is making it harder to predict future impairments, agree on valuations, arrange funding and gain shareholder approval. The crisis is also having a significant impact on deal confidence overall."

In the longer term, patterns of banking M&A globally are going into reverse. Deal making will look beyond just prices and valuations, while state bodies are increasingly being drawn ever more closely into M&A decisions, PwC's paper said. — The Nation/ANN