Petrus campaign has relevance far beyond Bawag
The activist shareholder highlights concerns about a former poster child for private equity ownership of banks.
For much of the past decade, financial sector insiders have lauded Bawag for its relatively high profitability in what is normally a very low-profit sector. Even Petrus Advisers, the activist investor now vocally shorting the stock, admits to previously being enthusiastic about the firm. Euromoney has also noted the bank’s progress.
At times, bankers have even held up Bawag as a model for successful private equity ownership of banks, in its case primarily that of Cerberus Capital Management. Indeed, Bawag provided Cerberus with something of a playbook for what to do with German Landesbank HSH Nordbank, whose privatization it led alongside JC Flowers in 2018 – around the same time as it was completing a stock market selldown of Bawag.
Today, Bawag’s management still bears the imprint of the Cerberus era.
Chief executive Anas Abuzaakouk and chief risk officer David O’Leary both joined Bawag from Cerberus when it controlled the bank. The strategy and approach that Cerberus’s ownership introduced largely remains intact at Bawag too, including stringent cost efficiency and not being afraid to seek higher returns in corporate and real estate financing far away from Austria.
Ironically, elsewhere in the German-speaking world, Cerberus itself looked a bit like a shareholder activist after its 2017 purchase of 5% of Commerzbank and 3% of Deutsche Bank – pushing for overdue change at these firms.
In Petrus’s view, the problem at Bawag is that its cost and return-focused approach has gone too far, to the extent that it has begun to erode the bank’s core business model, weighing on the loyalty of its cheapest and most reliable depositors. That has pushed it even further towards seeking higher returns in higher risk lending beyond its traditional Austrian network, Petrus thinks.
This could point to deeper weaknesses of profitability and relevance among traditional German and Austrian lenders – due above all to increased competition – that no private equity firm can cure. Even with rising interest rates, it’s hard to see how businesses like this could post a return on equity of more than 20%, as Bawag did in the first half of the year, simply by sticking to Austrian retail banking.
It is worth noting that the old HSH Nordbank – now known as Hamburg Commercial Bank (HCOB) – has also sought to boost profits through real estate financing in countries such as the UK and the Netherlands; a strategy learnt directly from Cerberus and Bawag. Echoing Bawag’s frustration with Austrian retail, HCOB’s new strategy is primarily the result of the difficulty of making decent returns in German corporate banking.
And the links to HCOB don’t stop there. Bawag bought 2.5% of HCOB as part of the latter’s 2018 privatization. The buyer in HCOB’s 2020 sale and leaseback of its central Hamburg headquarters was also the same Austrian real estate company, Signa, that bought Bawag’s historic headquarters in Vienna in 2013.
Bawag’s early release of its second-quarter results, showing a 1% increase in customer deposits, somewhat undermines Petrus’s case. If Bawag was as shaky as Petrus suggests, one might expect a decline in deposits following the series of banking crises that happened in March this year.
Almost all the sell-side analysts covering Bawag stock still recommend it as a buy, with none recommending a sell, according to Bawag’s website – although that’s hardly the point. Shareholder activists, if they have any worth, flag risks that the mainstream market overlooks, especially number-crunching stock analysts.
Today, activist attacks like this provoke more fear in Germany and Austria after the ground-shaking collapse of Munich-based based payments company Wirecard in 2020. Moreover, Petrus is a regionally specialised fund, set up by the former head of Goldman Sachs in Austria and emerging Europe, Klaus Umek. Much of its credibility comes from being close to the situation.
Umek’s firm can boast some success in its activist investment in similarly sized regional banks. It held out for a better price from Crédit Agricole for Italy’s Credito Valtellinese; and Moneta Money Bank’s takeover by local Czech group PPF collapsed after resistance by Petrus. It has also lobbied for change at Germany’s Aareal Bank, which Advent international and Centerbridge Partners bought last year.
Perhaps the activist’s underlying message is simply that European banks are not all immune to the volatility seen in US because of higher rates, despite hopes that regulatory oversight is stronger in Europe
In all these cases, Petrus had a positive fundamental view on the company. And until recently it had a favourable opinion on Bawag, owning 3% of Bawag stock until early this year. What made it change its view so dramatically?
One does not get the impression that Petrus threw huge resources into its investigation of Bawag. However, the investor’s open letter to the European Banking Authority on Bawag at the end of June reveals that it began to fully understand Bawag’s problems after analyzing its portfolio this year to see whether there were any banks at risk of the sort of volatility that has shaken US regional banks.
Among some other investors, concern about Bawag also seems to have been growing since the collapse of Silicon Valley Bank. Its stock price was down by 26% between early March and the launch of Petrus’s campaign, compared with a fall of 6% in the Stoxx 600 European banks index in the same period.
Even sell-side analysts question the logic of Bawag’s purchase of Idaho community bank Peak Bancorp last year. Although relatively small, at $65 million, the deal suggests a lack of strategic focus. That purchase also draws attention to US commercial real estate financing, an area of increasing default worry and one where Bawag’s exposure rose from €800 million in late 2020 to €2.5 billion at the end of 2022.
Perhaps the activist’s underlying message is simply that European banks are not all immune to the volatility seen in the US because of higher rates, despite hopes that regulatory oversight is stronger in Europe. It’s hard to dispute that. Banking supervisors would be right to be wary at this moment. And in the longer term, the noise around this campaign might make supervisors think more carefully about allowing private equity purchases of banks.