Back at the beginning of this decade, the future looked promising for Bank Handlowy, the Polish foreign trade bank which then enjoyed a virtual monopoly in corporate banking. Now it is looking rather less so, thanks to the increased foreign competition and Handlowy's failure to purchase any of the Polish banks including Bank Polska Kasa Opieki (Pekao) and Bank Zachodni which were recently up for sale.
According to Darius Gorski, analyst with Robert Fleming, the bank has lost more than half of its share of the corporate banking market since 1991. "In the early 1990s Handlowy was the flagship bank here with an 80% market share in corporate banking," he says. "They now have approximately 23% and are losing this to rivals."
Gorski says that Handlowy also has the slowest-growing balance sheet in Poland. Figures calculated using Polish accounting standards show it has gross profits for 1998 of Z465 million ($119 million) representing a fall of 46% on the previous year, while costs have crept up by 14% over the same period to reach Z532 million.
Its situation used to be very different. Until 1989 the bank had an enviable monopoly in foreign trade financing. Its staff were members of a social élite, whose close links to the communist party meant they were allowed to learn foreign languages and travel abroad.
A decade of independence has changed all that. Foreign competitors such as Citibank, Bank of America and ING Barings have set up shop in Poland, where they frequently undercut Handlowy in corporate lending. Handlowy is now squaring up to foreign heavyweights as well as increasing competition from the fast-improving local banks such as BRE, Pekao and Big Bank Gdanski.
Citibank's Albert May, director of corporate finance and capital markets in Warsaw says: "We still regard Handlowy as one of our largest competitors on the domestic capital markets and in investment banking. However things are already changing and BRE is becoming a lot better. Commerzbank is a strong equity shareholder and the bank has good management and strategy. Handlowy is already becoming noticeably less aggressive on the domestic debt syndication market."
"We are concerned with our performance," admits Artur Nieradko, member of the Handlowy management board, "and I am not expecting any growth in our share of corporate lending for the next two years because of our funding problems. Another problem was our Russian and other emerging market exposures...but you can't plan for that."
Handlowy's management, headed by Cezary Stypulkowski, is aware that to remain competitive in an industry undergoing consolidation, the bank needs to make at least one big acquisition. Ideally, this will be one which gives access to a large retail network, something that Handlowy lacks at present. That may not sound like much to ask, but the goal is proving frustratingly elusive.
In May Handlowy learned it had not made the shortlist to buy Bank Zachodni, the last of nine regional banks to be privatized. Bank Zachodni is a retail-orientated bank based in Wroclaw, with a balance sheet total of Z8.2 billion. At the end of May, Allied Irish Banks, already owner of a 60% stake in Wielkopolski Bank Kredytowy, secured exclusive negotiating rights to buy the bank.
"Ideal" partner
A more serious disappointment occurred earlier this year. In Pekao, the country's largest bank in terms of assets, Handlowy thought that it had found its ideal partner. But this January the Polish treasury refused even to put Bank Handlowy on to the shortlist of potential bidders for a 52% stake in the bank. That put an end to Handlowy's cherished dream of combining the two institutions to create the largest universal bank on the Polish market and cast uncertainty over where the bank goes from here.
Last month news emerged that the treasury has chosen instead to enter into exclusive negotiations with a consortium of Unicredito of Italy and German insurance company Allianz. The final shortlist included Deutsche Bank and Citigroup.
Although Handlowy was angling for Pekao as far back as 1992, the latter was always an ambitious target, as some simple arithmetic reveals. A 52% stake in Pekao, based on the mid-May share price, is worth approximately Z3.5 billion). The estimated cost of the stake is expected to be significantly more than that, possibly as much as Z5 billion.
By contrast, Handlowy's total market capitalization is only Z3 billion, less than half that of Pekao. Even if Handlowy had got the green light for the acquisition, it would have needed to embark on one of the largest ever capital-raisings in the region to pull it off.
The loss of Pekao is a major blow to Bank Handlowy which had not been shy of publicizing its desire to acquire the bank. Stanislaw Berkieta, vice president responsible for strategic projects at Citibank in Poland says: "Cezary Stypulkowski [president of Bank Handlowy] knows exactly what he wants. He wants to head the number one bank in Poland and he would have achieved that with Pekao. He can only do it now through other acquisitions."
Seven years ago Handlowy's management publicly informed the government that it wanted to get its hands on Pekao. The team was also convinced, in what with retrospect appears hubristic over-confidence, that it would get it. Nieradko says: "We thought that we were the best choice and so were confident of success."
Nieradko explains: "The two institutions make a perfect match. Their weakness is our strength and vice versa. Pekao's weakness is in the corporate sector and its lack of asset-placing capability. Our weakness is a lack of access to retail deposits which causes funding restrictions. A combination of the two banks would provide the best synergies possible for the banks, the shareholders and the country."
Pekao takes a different view, as Igor Chalupec, member of the bank's management board with responsibility for the privatization process, explains: "When we received the initial bids [in September] last year, four out of the five potential investors fulfilled the necessary criteria and one did not. That was clearly Bank Handlowy."