Jiri Kominek in Prague -

PPF Group has confirmed plans to re-enter the Czech Republic's already crowded retail banking sector with a new brand by 2011, a sign that Petr Kellner, the investment group's owner and the country's wealthiest man, has given up on hopes of purchasing CSOB from its Belgian parent bank KBC Group.

"The retail financial services segment has been, and continues to be, one of the pillars of our business activities," PPF spokesman Alexej Bechtin said in confirming to bne PPF's plans to establish a retail bank.

PPF is no stranger to the Czech retail banking sector, having once owned eBanka via its subsidiary Ceska pojistovna, the largest insurer in the Czech Republic. But PPF was not satisfied with the bank's performance on the local market and opted to sell this institution, which served private individuals as well as small and medium-sized enterprises (SMEs), to Austria's Raiffeisenbank in mid-2006 for a reputed €130m.

PPF continues to successfully own and operate its Home Credit retail loan operation, whose activities span from Central and Eastern Europe to Asia. In the first six months of 2010, Home Credit reported a net profit of €126m, a six-fold increase over the previous year.

Bechtin, however, says the new retail banking outfit won't have anything to do with Home Credit and will focus on classic retail services aimed at private individuals and SME entrepreneurs. PPF is currently seeking a license from the Czech National Bank for its new venture. "At this point we will not disclose additional details. However, I can effectively rule out speculation that what we are planning will be based on Home Credit, as this will remain a separate entity. What we are planning is a completely new entity and we are confident that people will be pleasantly surprised," Bechtin says.

No longer home sweet home

PPF's latest gambit to re-enter the Czech retail banking sector has left many analysts and other observers somewhat puzzled as to why Kellner would invest money in a project catering to the average punter at a time when cash is so dear. "The current reality is such that any new player wishing to enter the banking sector can forget about corporate banking, as the returns are far too low to warrant the investment," says UniCredit Group's chief economist Pavel Sobisek. "The only option for a newcomer is to focus on retail banking where they can hope to attract enough small clients in order to generate cash flow through small deposits."

"However, after factoring in all of the start-up costs - which include developing a retail network, marketing, hiring new staff, etc. - the investor cannot hope to see a quick return on his investment and must be prepared for the mid- to long-term haul," Sobisek adds.

Another expert familiar with PPF says that Kellner's financial empire is bogged down in long-term projects and is experiencing cash-flow problems, hence the move to create a new retail bank. In late September, Home Credit issued CZK3bn (€121m) of bonds to pay off earlier tranches laden with higher interest rates. Home Credit currently has about €1bn in outstanding debt. "Three years ago, prior to the financial crisis, PPF said the Czech Republic was too small for their business strategy and instead they would focus on larger markets. Now the crisis, coupled with mounting obstructions to doing business in markets such as Russia, has tied up a lot of capital and Petr Kellner is being forced to reconsolidate his business activities on friendly home turf in order to raise much-needed cash flow," the source, who declined to be named, tells bne.

Buying an established retail operation that would provide the stable cash flows it needs is proving hard. Polish media reported on October 12 that Home Credit is negotiating with KBC to buy its Polish retail lender Zagiel after earlier talks to purchase Poland's Meritum Bank from Innova Capital collapsed over price differences, with the bank eventually securing financing from the European Bank for Reconstruction and Development. Meanwhile, long-standing speculation that KBC is preparing to sell its Czech subsidiary CSOB appears unfounded, with the Belgium owners apparently unwilling to part with what is a cash cow. Even if it did want to sell, competition would be intense, with Poland's largest bank PKO BP reportedly putting CSOB at the top of its M&A list.

Thus, PPF is returning to the home market that it abandoned so precipitously during the last decade in search of profits and privatisation opportunities, only to find itself jostling for position in an increasingly challenging environment where other players have more cash and greater influence. On one hand, Kellner is facing competition from western giants such as Erste Bank Group, Societe General, UniCredit and KBC, while on the home front its chances of being successful in the upcoming tenders like Ceska Posta and Prague Airport are being squeezed by local players such as Slovak-Czech private equity outfit Penta Investments and its Privatbank venture, as well as locally owned Fio banka.