The hunted become the hunters

By bne IntelliNews November 24, 2011

Guy Norton in Zagreb -

Given the topsy-turvy times we live in, it was inevitable there would be a reordering of the ranks in the financial services sector in Central and Eastern Europe. The result is that Russia and other emerging markets are now as likely to be buyers of banks as sellers; or put another way, the one-time hunted are now the hunters.

That's certainly the view of Ithuba Capital, the Vienna-based investment banking boutique which oversaw the recent sale of Volksbank International (VBI) to Russia's Sberbank, a deal which it claims represents the start of a new era for the financial services sector in Europe. In September, Sberbank inked a deal that will see it pay an initial €585m for VBI, 51% owned by Osterreichische Volksbanken, with France's Banque Populaire Caisse d'Epargne and Germany's DZ Bank/WGZ Bank holding 24.5% each.

Thomas Mayer, managing partner at Ithuba, which advised Osterreichische Volksbanken on the sale of its CEE subsidiary, believes that the groundbreaking transaction marks a major reversal of the previous M&A trends in the region. Previously, the norm was for banks and insurance companies from the US and Western Europe to buy operations in CEE. Now, however, after first taking a hit from the bottom falling out of the mortgage securities market and now the rapidly falling valuations of bonds issued by highly-indebted Eurozone sovereigns, US and Western European banks find themselves under severe pressure to offload assets in order to shore up their rickety balance sheets.

Increasingly the buyers of those assets will come from Russia and other emerging markets, which haven't been as badly affected by the first and now second wave of the crisis. "Sberbank's purchase of VBI is one of the defining deals of the new paradigm, with a cash-rich business from a so-called emerging market, buying assets from a capital-poor business from a so-called developed market," says Mayer.

Tricky times

The sale came at a vital time for Osterreichische Volksbanken, which in July was one of only eight Eurozone banks out of 90 that failed the European Banking Authority's stress test on whether they could survive another financial crisis. At the same time, there were increasing doubts about whether Osterreichische Volksbanken, Austria's fourth biggest lender, could continue to service a €1bn bailout package provided by the authorities in Vienna. "The VBI sale was a very important step in the restructuring of Osterreichische Volksbanken," says Mayer.

Although the VBI disposal was characterised as a fire sale in some quarters - a €1bn price tag was floated when the transaction was first mooted last year - Mayer says that ultimately both sellers and buyer achieved a fair price. "VBI was sold at 1x book value - it's hard to find many banks trading at that value in the current markets," says Mayer, adding that as Sberbank's first major acquisition outside of its immediate neigbouring markets such as Belarus and Kazakhstan, it "wanted a Central and Eastern European banking platform in a digestible size."

At the initial price of €585m, the VBI purchase price represented less than 10% of Sberbank's forecast 2011 net profit of over €8bn. The price is also a fraction of the 3.8x book value that buyers paid on average for CEE banks before the global credit crunch hit in 2007.

For such a relatively modestly outlay, Russia's biggest bank gets access to the banking markets of Slovakia, Czech Republic, Hungary, Croatia, Bosnia-Herzegovina, Serbia, Ukraine and Slovenia. The purchase also doesn't include VBI's heavily indebted Romanian operation. However, it's true to say that the acquisition hasn't found universal favour with banking analysts, with some claiming that Sberbank has done little more than acquire a minor presence in CEE. "Because VBI has a very small asset base and fairly tiny market shares in all of its markets, Sberbank essentially agreed to acquire several banking licenses rather than a major regional player," point out credit analysts at Raiffeisen Bank International.

Svetlana Kovalskaya, banking analyst at Renaissance Capital in Moscow, agrees "the VBI deal is too small to make a difference to Sberbank currently, in our view," though she says the Russian bank might be able to tap into the growing role that Russian corporations are playing in CEE.

Ithuba Capital's Mayer disputes the criticism that VBI's small market shares in the CEE markets mean that Sberbank has done little more than acquire a nameplate presence in the region. "Sberbank has taken a very disciplined approach to its expansion into Central and Eastern Europe, which is of supreme strategic importance for it. VBI is the right size for Sberbank," says Mayer, adding that Sberbank is acquiring over 300 branches across the region and an experienced management team. "VBI has a fairly low-risk business model and long-term experience in Central and Eastern Europe, and so it ticked all the boxes for Sberbank."

For its part, Sberbank says it's looking to double VBI's current lowly return on equity of 5.5% by 2014. This is in line with Sberbank's target of earning around 5% of net profit from its international operations by 2014, compared with the 2.3% it reported at the start of this year.

Willi Hemetsberger, who founded Ithuba Capital in 2008, expects further sell-offs by other cash-strapped Austrian banks such as Hypo-Alpe-Adria, which was nationalized by the Austrian government in December 2009 and is now looking to restructure its operations.

Elsewhere in the region, Poland is seeing a reshuffle of its banking sector as several banks have either been sold or are up for sale by their foreign owners to help them meet the new capital requirements at home. They include Banco Comercial Portuguese's 65.5% stake in Bank Millennium and Belgian bank KBC Group's 80% stake in Kredyt Bank.

Spain's Santander, which in September 2010 bought 70.4% of Poland's fifth largest bank Bank Zachodni WBK for €2.9bn, has filed a binding offer to buy the Kredyt Bank stake, thought to be worth about PLN4bn (€930m). However, analysts say that cash-flush banks from Russia, China and other points east might make better partners for Poland's profitable banks, though offers from Russian interests wouldn't be received with much enthusiasm from Polish banking regulators, many of whom want to see a "re-Polonisation" of the country's banking sector.

Russian banks will be more welcome in Lithuania, where the governor of the Bank of Lithuania said he has no objection to Russian banks setting up shop. "Whether it is Russia, China, Zimbabwe, some Burundu Murundu or Mars, it does not matter. The bigger the competition, the better for us. I have no prejudices in this case," Vitas Vasiliauskas, told newswires in November.

Vasiliauskas said several Russian banks are targeting the Lithuanian banking market, with one such bank's plans fairly advanced. Without providing names, the governor said that the establishment of a Russian subsidiary in Lithuania would be considered at the next meeting of the central bank's board of directors. According to local media, it is Russia's Investment Trade Bank.

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