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Flip forward five years. A spate of revolutionary transactions is reshaping the banking industry in central and eastern Europe. Citigroup has just bought OTP, Crédit Agricole is in talks with Banca Intesa, and HSBC is poised to take over KBC.
Sounds ridiculous, doesn’t it? But then, at the turn of the millennium, people would have laughed at the idea that Santander would buy Abbey National or that RBS would become one of the 10 biggest banks in the US.
Looking at central and eastern Europe today, it’s clear that consolidation in the banking industry is reaching saturation point. Buying opportunities are apparently limited to a handful of banks in a handful of markets. Romania, Turkey, Ukraine, the Balkans and, to a lesser extent, Russia and Kazakhstan will see some action over the next 12 to 18 months. But once the remaining attainable assets in those countries have been bought, what next?
Given that the traditional route into the region – buying directly in the local market through a privatization or from an entrepreneur – will be restricted to these riskier east European markets, banks will have to think of more radical or subtle ways of building an influential presence. Institutions that already have a foothold, such as Austria’s Erste Bank and RZB International, Belgium’s KBC, France’s Société Générale (SG) and Italy’s Banca Intesa, will have to decide what their strategy will be: whether to take the plunge in the east (as some are doing), whether to tie up with banks of similar size and stature in the style of UniCredit and HVB, or whether to sell their business and reap the rewards.
Banks that have a smaller presence, such as Allied Irish Banks or Millennium BCP, have less flexibility but could also find themselves caught up in the drama. ABN Amro, for example, last month announced that it would be selling its 40.2% stake in its Hungarian subsidiary, K&H, to KBC. The Dutch bank, which sold its stake for €510 million, said its decision was “in line with its strategy to divest non-core assets”.
One intriguing possibility could be that the global banks, particularly Citigroup and HSBC, make a play for the regional powerhouses that have a ready-made portfolio of local assets. Although present in a number of markets, neither Citigroup nor HSBC has a dominant position in the increasingly attractive area of retail banking. Neither is among the top five biggest banks by assets in central and eastern Europe. Both have the financial muscle to surge to the top in one fell swoop. These are the two most obvious candidates, but other big banks with deep pockets can also be thrown into the mix. No observer expects a groundbreaking deal soon, largely because the regional banks are under no pressure to sell, in fact many are still expanding. Valuations are so high as to be prohibitive for any potential transaction. But some say it’s not unrealistic to think that things might change within the next few years.
“Can already committed players be bought by some bigger bank? It’s possible,” says Jiri Klumpar, a director at PWC in Prague. “At the moment banks such as SG, KBC and so on are focused on consolidating their holdings, so it will be another two or three years before they would even consider selling their central and eastern European units. But it could happen.”
Jonathan Warburton, MD and head of CEEMEA financial institutions at Citigroup, says: “Global banks may well at some point decide to widen their presence in the region and could adopt the portfolio approach rather than buy on an individual asset basis.”
For the time being, these banks appear to be more interested in building their presence in Asia. Citigroup, for example, intends to pursue more acquisitions in China and expand rapidly in India. HSBC too is keen to cement its leading position in the world’s most populous region. Other top-tier US and UK banks, such as Bank of America and RBS, have also bought stakes in the big Chinese banks.
But central and eastern Europe’s appeal is getting stronger. The consumer credit markets in the region are still relatively immature. Retail loans as a percentage of GDP for the Czech Republic, Poland, Slovakia, Hungary and Slovenia, for example, are just 9% to 15%, according to Standard & Poor’s, and these are the more developed markets in the region. With stellar economic growth expected over the next few years, central and eastern Europe’s potential is clear. And to be successful in retail, scale and risk diversification will be of critical importance.
“There will be a time when global banks may focus more on central and eastern Europe,” says Warburton. “Then the regional players will become more vulnerable.”
For the future
Some have already tried to buy them but failed. Klumpar says that two years ago, a US bank (he declines to name which one) tested the water with Erste about a potential deal but was quickly rebuffed. One investment banker recalls taking a look at OTP for a global bank client. Although ostensibly a Hungarian outfit, OTP also has a presence in Bulgaria, Croatia, Slovenia and Romania. When the banker initially approached OTP’s management the answer was “No”. One stumbling block to a potential acquisition is OTP’s chief executive, Sandor Csanyi. Arguably Hungary’s most powerful man and one of its richest, he has iron-fist control over OTP, even though the management and employees own only 2.8% of the stock compared with foreign investors, who own 88.9% (significantly the state owns a golden share). It is widely known in the industry, says the banker, that Csanyi would only consider an offer if it included a considerable premium to the growth that he thought the bank would achieve and if he retained a very senior position, such as chairman, in the merged entity. This seems a fair argument when you consider that OTP is the highest-valued bank in central and eastern Europe and is trading at four times its book value.
