Czech lender GE Money Bank listed at the very bottom of its pricing range on May 5, raising questions as to why US owners General Electric had opted for an initial public offering (IPO) rather than a sale to a strategic investor, and why it had listed only on the illiquid Prague Stock Exchange.
GE sold 51% of its Czech banking unit at CZK68, after offering an initial pricing range of CZK68-85. That guidance was already below early estimates, which sources at the underwriters Citigroup, Goldman Sachs, JP Morgan and Wood & Co had suggested were in the right area.
The deal values the renamed Moneta Money Bank at CZK34.75bn (€1.29bn), compared to tangible equity of CZK22.8bn after a planned dividend payout to GE. Earlier market estimates had put a price tag of CZK40bn-60bn on the asset. The price to book value multiple based on 2015 results is 1.5, compared to 1.8 at rival lender Komercni Banka (owned by Societe Generale), 1 at Erste Bank of Austria (also listed in Prague) and a European average of around 0.75.
The low pricing may offer investors a windfall. The shares rose 3.2% to CZK70.2 at the start of trading in Prague on May 6. The bank has also pledged to return 70% of profits to shareholders in dividends, roughly comparable to Komercni’s payouts of at least 80%, offering a healthy yield for investors.
The shortage of IPOs in Europe, and the lack of big flotations in Central Europe, had been expected to boost demand. The IPO is the biggest in Prague since coalminer New World Resources raised $2.5bn in 2008. This week, however, NWR declared itself insolvent, with shareholders expected to lose their shirts. Investors will hope that's not a bad omen for those taking a punt on Moneta.
GE had initially offered GE Money Bank in a trade sale, which attracted binding bids from two private equity consortiums: Cinven - together with local investment firm Penta Group - and Warburg, with CVC and Centerbridge. The bidders were shocked when GE opted for an IPO and initially thought it was just a gambit.
The low pricing has them feeling vindicated. “It’s a bit of a mystery why [GE chose an IPO] when the pricing is lower than I thought it would be and the financial bids are somewhere just north of the mid-point of the [IPO] pricing range,” said one of the bidders.
“Thus I can’t see why take the risk of an IPO for basically no premium and the hassle of taking the time to sell down,” the source adds. GE has said it will sell down the rest of its stake in Moneta, but not starting earlier than after six months.
Local banks didn’t bid, amid competition concerns, nor did banks fleeing the new hostile government in Poland. Much feted Chinese investment group CEFC also did not follow through on a very strong preliminary bid.
The choice to load all of the shares onto Prague's sleepy bourse, rather than a dual listing in London, also now looks misguided. The PSE is relatively illiquid, with a turnover of just CZK674mn a day. The total market capitalisation of the 24 stocks on the main market has shrunk from a peak of $86.7bn in 2008, around when NWR listed, to just $25bn, according to Bloomberg.
The exchange also has a surfeit of financial stocks, with a weighting of 60% of the main PX index. Moneta will join Komercni, Erste and insurer Vienna Insurance Group, and will be the fourth-largest stock on the PSE overall.
However, some insiders expect the stock to do well after its rocky start, given the amount of local capital seeking a home. “Smaller markets can have advantages,” says Alex Verbeek, an investment banker at KPMG. “Local investors and institutional investors will be eager to invest in local opportunities. Especially because of the lack of local investment opportunities you can get a premium.”
Whether the stock will prosper depends on the outlook for the Czech banking sector, and the chances for number six player Moneta. The Czech Republic has good macroeconomic fundamentals, with decent GDP growth and rising employment and wages. The banking sector has benefited from an accommodative monetary policy, easy funding, and improving asset quality.
According to Moody’s, the Czech banks it rates are the best capitalised in Central Europe. GE itself has a core Tier One ratio of 17.7%.
However, low interest rates – with the central bank benchmark rate stuck at 0.05% since November 2012 – and tough competition have squeezed margins. Regulatory requirements have forced banks to keep money on deposit at the central bank and to invest in government paper, all carrying low, if not negative, interest rates.
Lending has grown healthily, but not by enough to stop banks being overly liquid. Moody’s says Czech banks have the lowest loan-deposit ratios in the region and are the most liquid, with half of interest-bearing assets held in government bonds or at the central bank.
This has led to a competitive scramble to lend, with banks dropping rates and terms. Mortgages have become commodified. At the same time deposit rates have reached rock bottom, though some bankers speculate lenders might be forced to impose negative interest rates if central banks do.
Net interest margins (NIM) in the Czech Republic are the lowest in the four Central European markets, though they are still well above European levels. Nevertheless Czech banks are still the most profitable in the region thanks to lower risk costs and higher efficiency, giving them an average return on equity (ROE) of roughly double the European average at 14%. GE itself has a cost-income ratio of 45%, one of the best in the local market.
“As you go into a low interest rate environment efficiency becomes a key factor that separates banks,” says Arif Bekiroglu of Moody’s.
Analysts expect that future profitability will come down but Czech banks will still be ahead of the pack. “The profitability will be good in the near future because the NIM already came down and has stabilised recently,” says Milan Lavicka, banking analyst at J&T Banka in Prague. “There could be come pressure on fee income. It will decline further, but at a much slower pace than in previous years. The big pressure on earnings is already over.”
“The good times will continue but the pressure will be bigger than in the past,” says Jiri Stanik, founder of consultants Helgi Library in Prague. “It will be much more difficult to grow profits and revenues in the future. Banks must grow loans to increase revenues.”
Moneta, like many of its competitors, plans to focus on lending to the higher-margin, but riskier, small and medium-sized business (SME) sector. Tomas Spurny, chief executive, has said he aims to beat the rest of the banking sector by growing loans at mid-single digits.
Banks are also trying to expand fee and commission income – which up to now has been falling – by pushing credit cards and investment products. “The name of the game is to utilise your client base more than in the past,” says Stanik.
However, Czech customers remain very conservative. Mortgages account for 74% of total loans to residents, according to a central bank report in April. Stanik estimates that Czech households hold 80% of their financial assets in bank deposits (and two thirds of this in current accounts).
As the sixth biggest bank by assets, Moneta could struggle to make itself heard in the marketplace, but analysts point out that it has several competitive strengths. Its strong branch network – the fourth biggest in the country – and its wide footprint in smaller towns offer a good chance to tap small businesses in the same way that it has done with consumers.
Its focus on consumers, where it ranks second in the market, is the main factor behind its higher margins (it has a NIM of 6.7%) and profitability, with a ROE of 16.5% compared to a market average of around 13%. Nevertheless the bank has guided that it targets a ROE of 12-13% in the medium term.
Lavicka says the bank has already changed its strategy by cutting lending rates this year. “They stopped the trend of losing market share but at the cost of margins,” he says.
Competitors claim they are not worried. “I see relatively little scope for them to turn more aggressive in the current environment,” Andreas Treichl, Erste’s chief executive, told an analyst meeting on May 4. “I am not really worried by GE,” he added. “I don’t think this will change the landscape of the Czech banking sector substantially.”