Subprime crisis states lenders’ M&A appetite

Worldwide, the unrest on international markets has had a multiple effect on the global banking system. In the United States, it has turned once sturdy, well-off lenders into sitting ducks waiting to be bought off for discount prices by their not-long-ago competitors. Also, deals already have and will be expected to drop in sizes; just see the discount price on Bear Stearns shares, which were valued and sold at USD 2 each last week, down from USD 60 a few days before. While U.S. lenders are struggling and might further resort to domestic consolidation, the European scene appeared to also be set for big acquisition-prone banks such as Spain's BBVA, UniCredit and Intesa Sanpaolo of Italy and France's BNP Paribas. Analysts thought they would hurry up and start looking for juicy deals in emerging markets, but that seems to have been a wrong guess. Rather, the U.S. crisis inhibited their will to go to great lengths for deals that might not turn out to be winning bets after all. Central and Eastern European banks, although less affected by the subprime crisis, took a conservative approach to growth and chose to focus on making it alive and well out of the crisis rather than going on a prowl. Their behavior announces a trend which looks set to persist for a good while.
“It is likely that many financial institutions will be quite reticent about voluntary mergers and acquisitions in this period given the present world economic climate. This year’s focus is more likely to be more on minimizing the impact of the US sub-prime crisis, unless mergers and acquisitions are forced by circumstances, or if an exceptional opportunity arises,” said Wilson Balachandra, M&A Partner with KPMG.
Surveys will probably show that the management teams’ confidence has decreased in 2008, but that will not bring the M&A activity to a complete stop, said Adrian Stanciu, Senior Associate with Deloitte.
“Since macroeconomic stability has an impact on M&A activity, the new wave of consolidation may not be driven by market acquisitions and territorial exposure, but by measures of survival and counter-measures in the war led by the large financial groups. Banks need to form alliances or partnerships in one way or another. As mentioned earlier, today this is no longer a matter of business development, but of survival,” added Stanciu.
“I think trans-border acquisitions will only be triggered by non-performance and will only occur if non-performing banks cannot be purchased by co-national lenders. EU-15 countries are reluctant to external acquisitions and defend their national champions fiercely. When the mortgage loan and consumer loan markets are fully integrated, in 2010, the reluctance toward cross-border takeovers might diminish,” said Ella Kallai, Chief Economist with Alpha Bank Romania.
Until then, mergers that were deemed as sure things by some analysts got cancelled due to the international unrest.
France’s biggest listed bank BNP Paribas last week announced it was no longer interested in acquiring stricken rival Societe Generale which had previously announced EUR 4.9 billion of losses caused by one of its traders.
Rumours about the two banks’ intentions to resort to hostile take-overs against each other have been going on since 1999, when SocGen got away from a takeover attempt by BNP Paribas. This time, many analysts thought BNP will finally follow through on its initial plans, especially since the SocGen’s vulnerable situation provided for seemingly a once-in-a-lifetime opportunity. An opportunity which BNP kindly declined.
The bank said the conditions were not right for a deal to take place and is now “well-placed to continue to support its customers and economic development.”
BNP was not the only CEE player to view SocGen’s misfortune as its own luck. French bank Credit Agricole was also thought to be considering a potential bid, as were Italian rivals UniCredit, Anglo-Chinese HSBC and the French Caisse des Depots et des Consignations (CDC), a state-owned bank, who could do the bidding of the French government.
Still, lately there has been no word of any actual steps being taken for an M&A involving SocGen, proving that banks would rather take a step back and mind their businesses rather than venture off on moving sands.
Speaking of UniCredit, the once insatiable lender will take a time-out from bank-shopping, local bank officials announced. The bank thinks that there are no more takeover targets left in the CEE, therefore it will focus on growing organically and integrating its pre-subprime purchase, Capitalia, UniCredit Romania head Rasvan Radu said last week.
The May 2007 merger of UniCredit and Rome-based Capitalia created the largest bank in the euro zone and the seventh-largest in the world by market capitalization, which exceeds EUR 100 billion. The new bank is the second-largest bank in Europe, trailing only HSBC. UniCredit was already one of Europe's top 10 lenders after purchasing Munich-based HVB, but its latest CEE acquisition might also be its last for a good while.
Locally also, signs of the subprime-rooted consolidation trend seen in the U.S. have been null. Since the banking market was not as badly hit as its Western counterparts, neither were there weakened banks in need of saving nor any local players seizing new opportunities for cheap acquisitions. From this viewpoint, Romania’s case is different both from the United States’ and Western Europe’s since the subprime crisis neither enhanced nor inhibited consolidation efforts.
“The level of competition on the Romanian banking system resembles the average EU-25 level, as shown by the Herfindhal index (an index of industry concentration), and it does not indicate the need for a consolidation. In this regard, the current structure of the banking system seems stable. Still, surprises can always appear,” said Kallai.
“The local banking system is probably at the end of its consolidation process. We are most likely witnessing the final consolidation in terms of medium-sized banks. Larger deals would probably take place at the global market level, certainly with an impact on the Romanian banking system,” said Stanciu.
Another explanation for the lack of M&A appetite on the market is simply that domestically-owned lenders are scarce and their potential purchasers even scarcer.
“There are few banks left in the local sector which have not yet been taken over or are not yet controlled by strong foreign investors or important financial groups. Banca Transilvania, Banca Carpatica and maybe others might become potential targets of important financial groups (not necessarily European), depending on the further development of the Romanian banking sector and of their own position in the market,” said Balachandra.
He added that M&As could theoretically happen at any level, but it is more likely that a local merger/acquisition at top level will be dictated by a global transaction between parent-banks. “In the future, it is possible that the number of banks in Romania will decrease, if smaller banks have difficulty competing and are taken over by important financial groups,” said Balachandra.
“The top 10 banks have a large market share, while the others have rather insignificant stakes. This means that small size financial institutions will have to merge, to acquire or to be acquired by other players, to face increasing competition and to win a bigger market share,” said Cezar Furtuna, Senior Audit Manager with KPMG.
Stanciu agreed that mergers and acquisitions are more likely to happen between small and medium-sized banks.
“Although there are limited opportunities left, Romania can still present attractive growth opportunities in this sector, including an expected increase in penetration of financial products and services. In the next couple of years, I would expect a couple of medium-sized M&A deals, and probably a larger one, like Banca Transilvania or CEC,” Stanciu said.
Up until now, Erste Bank – BCR’s case aside, the most important M&As on the market were generally consequences of external mergers between parent-banks.
For instance, local deals climaxed last year, with the triple merger between UniCredit Bank, Banca Tiriac and HVB Bank completed in June. The merger propelled UniCredit high up in banking rankings and increased its chances of becoming the fourth biggest lender on the market in a few years’ time, according to Chairman Dan Pascariu’s estimates.
Integration strides cost the bank a fair share of its profits up until the end of last year, but figures have started to pick up as of December, according to Chief Financial Officer Stanislav Georgiev. Overall, consolidation appears to have been a winning solution for UniCredit Tiriac, which is now developing further and analyzes whether it is better to start up a new company dedicated on consumer finance or just have specialized departments within the bank.
“Either way, this plan will be implemented by the end of the year. There is a specialized division within the group called UniCredit Finance and we are now discussing with them the exact path to follow,” Radu told Business Review.
The bank has thus chosen the slower-paced organic growth over the acquisition oriented approach. Radu said there are no purchase-noteworthy lenders left on the market and “Banca Transilvania has never been a target for us.”
Therefore, he announced a plan to expand organically by 70 new branches this year and by a total of 300 in three years' time, starting from big cities and going down from there.
Aside from UniCredit’s triple merger across part of 2006 and 2007, another international deal that implicated local banks was that involving ABN Amro.
When the RBS consortium's acquisition of the lender was finalized in the summer of last year, the local management of the bank said the move might result in the rebranding of ABN Amro Romania, but until then it would be “business as usual,” in president Peter Weiss’ own words.
Starting with the end of 2008, RBS will operate in Romania under its own brand and the integration process was scheduled to start this year as well, said Hanne Wolf, head of communication with ABN Amro Europe.
Aside from ABN Amro and UniCredit’s cases, there was another European-level deal rumoured to happen a few months ago, which could have largely influenced the local banking system – that between Raiffeisen Bank and Erste Bank, a merger denied by both lenders at that time.
In spite of the refutation, analysts say the idea of a union between titans was not as bad after all.
The merger between the two banks would take the new lender on the leading position in Austria, both in terms of assets and Tier 1 capital, surpassing Bank Austria Creditanstalt.
“The question is whether or not this potential merger would infringe on competition regulations. We would have two strong banks at the top followed by relatively small banks (although 15 of them are among the world’s 1,000 biggest lenders). The third bank would have a Tier 1 capital three times smaller and assets two times smaller than those of the second-ranking bank. Would the local authority on competition like this situation? Maybe, maybe not,” said Kallai.
“I would consider a potential merger between the two mentioned banks as a long-term project that could happen only at the European market level, and not on a local basis. As they both need to search for new synergies from the deal, and that takes time, a future merger will need a certain “click” in their overall strategies. The European financial groups will probably need to work together in finding ways of maintaining themselves competitive in front of players from the US market and nowadays the Chinese one,” said Stanciu.

By Ana-Maria David