Emerging Europe: KBC bulks up in Bulgaria
Belgian group wins bidding for NBG subsidiary; further consolidation seen likely in crowded market.
KBC is set to make its first big acquisition in emerging Europe since the financial crisis after winning the bidding to buy Bulgaria’s fourth-largest lender from National Bank of Greece (NBG).
The Belgian group will pay €610 million for United Bulgarian Bank (UBB) after beating off competition from Hungary’s OTP Bank. The purchase price also includes NBG’s Bulgarian leasing subsidiary, Interlease.
The acquisition will propel KBC into the number three slot in the Bulgarian banking market, a position the group has targeted since acquiring small local lender CiBank in 2007.
Luc Gijsens, KBC
“We always want to have a top-three position in our core markets, which include Bulgaria. There was a gap in our coverage on the banking side,” says Luc Gijsens, KBC’s head of international markets.
Plans for expansion in Bulgaria were put on hold, however, after KBC’s €3.5 billion bailout by the Belgian government in 2008. As a condition of receiving state aid, the European Commission required the group to dispose of several non-core assets in central and eastern Europe.
In 2012, KBC duly sold its Polish subsidiary, Kredyt Bank, to Santander and its 20% holding in state-owned Slovenian lender Nova Ljubljanska Bank to the local government. It also exited the Russian market via the sale of Absolut Bank to domestic private pension fund Blagosostoyanie. The following year, KBC’s Serbian arm was bought by Telenor and Société Générale.
That left the group with a banking presence in four CEE countries: Czech Republic, Slovakia, Hungary and Bulgaria. In Czech Republic, KBC owns market leader CSOB, which is also number four in Slovakia. K&H Bank, the group’s Hungarian subsidiary, is the second-largest retail lender in the country and in the top three overall.
The region accounted for around 22% of the group’s total loan portfolio at end-2015, according to analysts at Raiffeisen Bank International.
KBC also has a strong presence in the insurance sectors across its CEE network, in keeping with its group bancassurance model. DZI, its Bulgarian insurance subsidiary, is one of the top three providers in the country.
Gijsens says the opportunity to sell insurance products to UBB’s large retail client base was one of the main drivers behind the decision to buy the bank. “We have been underrepresented on the banking side, so acquiring UBB will hugely increase the potential for cross-selling,” he says.
The acquisition will also add asset management, factoring and leasing to KBC’s product range in Bulgaria. “This will give us the opportunity to benefit from the expertise we have in these areas in our other core markets,” says Gijsens.
We are always open to suggestions, but we have found that dealing with NPLs in-house and on our own strength is less damaging - Luc Gijsens, KBC
Other factors that made UBB an attractive target were its strong brand and low cost-to-income ratio, adds Gijsens. He also praised the bank’s recent success in improving its asset quality, while noting that work remains to be done on reducing bad debts. Non-performing loans accounted for 28% of total lending at UBB in March 2016, down from 37% at the end of the previous year.
CiBank is also still dealing with legacy bad debts from the financial crisis era, mainly in the real estate sector. Gijsens says KBC is unlikely, however, to follow the example set by local market leader UniCredit Bulbank earlier this year by selling non-performing portfolios to third parties.
“We are always open to suggestions, but we have found that dealing with NPLs in-house and on our own strength is less damaging,” he says.
News of KBC’s acquisition of UBB was greeted with enthusiasm in Bulgaria. Bankers hailed it as a vote of confidence in the sector after the upheavals of 2014, when the collapse of Corporate Commercial Bank and a state bailout of fellow locally-owned lender First Investment Bank (FIBank) attracted a slew of negative headlines.
“The UBB sale is good news because it means we are past the crisis,” says Levon Hampartzoumian, the long-serving CEO of UniCredit Bulbank. “It is also good for the Bulgarian economy, because in due course there will be another strong player in the market.”
Analysts also note that the deal’s pricing – at 1.1 times book value, or 1.29 times after €81 million of valuation adjustments – is handsome by recent CEE standards. Peter Atanasov, deputy CEO of regional investment bank BAC Securities, puts fair value for UBB at 0.96 times book value, based on an estimated return on equity of around 9.8% for 2016.
Locals are hopeful that the deal could also mark the start of what many see as an overdue wave of M&A in the Bulgarian banking sector.
“The Bulgarian market is relatively fragmented, given the size of the country and the economy,” says Hampartzoumian. “We will likely see more consolidation in the next 12 to 18 months.”
There is little agreement, however, as to what form that consolidation might take. No other banks are known to be up for sale, although local speculation has named FIBank and two more Greek subsidiaries, Eurobank and Piraeus, as possible targets.
On the buy side, OTP, which owns number two Bulgarian player DSK Bank, is known to be keen to boost its presence in the market. Gijsens says KBC could look at further acquisitions in Bulgaria, although he notes that the group will be happy with its market position once the UBB takeover is completed – an event that is expected before the end of the second quarter
Hampartzoumian says UniCredit Bulbank is unlikely to take part in any consolidation.
“Our size is such that we can achieve very good results without needing to expend capital and effort on an acquisition,” he says.