Nicholas Watson -
With Western banks moving further east in search of better opportunities, Russia is looking as though it will be one of the busiest M&A markets in 2007.
This year has already seen a significant increase in the number and size of Russian acquisitions by foreign banks. Notable deals include Raiffeisen International's $550m takeover of Impexbank, Hungary OTP's $477.5m acquisition of Investsberbank, as well as the minority stakes being bought by Societe Generale and Commerzbank in Rosbank and Promsvyazbank, respectively.
And the fat profits that international banks expect to earn from their Russian purchases are expected to get even fatter next year, which should fuel more deals at higher multiples. Foreign banks are being pushed into Eastern Europe by slow growth and more intense competition at home as much as they are being pulled by the promise of big returns from Europe's emerging markets.
First stop on the eastern odyssey was Central Europe in the 1990s, but when these markets matured international banks have continued their march into the Balkans and, particularly last year and this year, Ukraine.
Experts say Russia's financial sector is booming on the back of high oil prices, which is fuelling the economy and giving rise to a thriving middle class. Russians are starting to borrow heavily, but from a very low base, for such items as cars and houses. Given that few people are predicting a fall in the oil price some time soon, this trend will probably continue and attract more and more Western banks into the market.
On the sell side, analysts say many owners of Russian banks are looking to divest themselves of these assets for several reasons: banking is not a core activity for some and others want to cash in on their massive return ahead of the uncertainty that comes with President Vladimir Putin's decision to step down as president in 2008.
In addition, the more the banking sector develops, the greater the competitive pressures that will drive some of these smaller, less efficient banks into the hands of other banks or even out of business altogether.
The questions is, of course, which Russian banks will be the most likely to get bought, and which Western banks will most likely do the buying.
In a recent report, analysts at Moscow-based investment bank Renaissance Capital looked at the track record of actual deals in Russia and Ukraine over the past couple of years and identified three principal factors that buyers look for in their targets.
Firstly, experience suggests that acquirers have a strong preference for banks with developed branch networks, "as it is becoming increasingly difficult and costly to replicate them under present conditions," says Renaissance.
Secondly, a solid and diversified customer base is one of the prime determinants of the strength of a bank's franchise. And thirdly, prior involvement of foreign investors such as multilateral banks and development institutions adds credibility to those banks up for sale.
Interestingly, the financial health of a potential target is not a prerequisite. "We have seen a number of examples in Eastern Europe when the takeover targets (Bank Gospodarki Zywnosciowej S.A, BRE Bank S.A. and Kredyt Bank S.A. in Poland) were in relatively poor financial shape, and warranted recapitalisation by the new owner. This didn't dissuade foreign buyers who were looking for a stronghold in the market," it says.
Using these parameters, Renaissance picked as its top acquisition targets Absolut Bank and Sibacadembank. "We believe the likelihood of their sale to a strategic investor as early as 2007 is fairly high." Runners-up, or those likely to be sold in the next two to three years, include Bank St Petersburg, BIN Bank, Credit Bank of Moscow, Petrocommerce, Probusinessbank, Bank Soyuz and Zenit Bank.
The foreign banks that Renaissance reckons are most likely to buy assets in Russia are BNP Paribas, Credit Agricole, KBC and Erste, which it says are poorly represented in Russia and are almost certainly considering making an acquisition in order to catch up with their foreign peers.
However, Renaissance also says that banks with a presence in Russia already, such as HSBC, ING and ABN AMRO, could resort to making another acquisition in order to keep growing. A multiple-acquisition strategy is especially apt for Russia give the sheer number of small banks that exist in Russia. By all accounts the country still has far too many, far too small banks.
Nevertheless, experts warn that as always when dealing with Russia, it is wise to remember that nothing is as simple as it seems. Though the Russian government has until now appeared sanguine about allowing in foreigners to shore up what has traditionally been a weak link in the economy - no major M&A deal in Russia goes ahead without prior political approval - that doesn't mean it won't in the future.
"The acquisition of a top 10-15 Russian bank is unlikely to be popular with the government," Renaissance says. "For other banks, however, we view this scenario as unlikely in the medium term due to Russia's impending WTO accession."
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