Business is brisk for Jan Derylo. The head of Poland investment banking at fast-growing central and eastern Europe (CEE) regional boutique Wood & Co has watched valuations soaring as competition for market share heats up. Mr Derylo says acquisition offers with price/earnings ratios of 14 times or more, sometimes well in excess of the target companies' estimates of their own value, are symptomatic of the appeal that Poland holds for investors, both domestic and foreign. Resilient gross domestic product (GDP) growth, a flexible and competitive labour market and a more diversified economy than most of those in the CEE have all stoked demand for Polish assets.
The banking sector is already participating in the surge of merger and acquisition (M&A) activity. During 2010, a consortium of local private equity fund Abris Capital and local brokerage IDMSA finalised the purchase of WestLB's operations in Poland, Getin Noble Bank bought the Polish operations of GMAC and Allianz Bank, and Santander acquired AIG Bank. The largest deal occurred in September 2010, when Santander agreed to buy Allied Irish Banks' (AIB) 70% stake in Bank Zachodni WBK for almost €3bn. Bank Zachodni is the country's fourth largest bank by Tier 1 capital with the third largest branch network, and it recorded the country's highest profits on average capital in 2009, at 26.5%.
Final approval for the Zachodni deal from Poland's bank regulator, KNF, is expected during the first quarter of 2011. In the meantime, the bank's management are not conducting interviews with the press, but in written responses CEO Mateusz Morawiecki says the acquisition by Santander will give Zachodni "room to further improve business performance, grow our market share in some segments and increase operational efficiency based on Santander's best practices".
In an investor call shortly after the deal was announced, Santander management said it expected cost savings of about 300m zlotys ($103m) in the three years from 2011 to 2013, bringing Zachodni's cost-to-income ratio down to 41%, from 50% in 2009. That might involve merging the bank with the smaller consumer finance operations of AIG Bank that Santander had integrated earlier in 2010.
This would also fit the strategic change of direction already ongoing at Zachodni. According to Mr Morawiecki: "When the situation in the financial markets began to stabilize, one of our key business objectives was to rebalance credit exposure and we successfully shifted from commercial property towards consumer banking and small and medium-sized enterprises [SMEs]."
Distressed sellers
So far, the main driver for M&A activity in Poland has been the weakness of foreign parent groups, or strategic shifts even if the parent is still healthy. The Polish banking sector as a whole was relatively well-capitalised and liquid going into the crisis. An aggregate loan-to-deposit ratio of about 117% was elevated by foreign-owned banks extending credit lines to their local subsidiaries.
The sale of Bank Zachodni by AIB, as well as the disposals of WestLB's and AIG Bank's Polish operations, were all part of recapitalisation and rationalisation programmes after their foreign parents were rescued by their respective governments. For GMAC and Allianz Bank, the sales were part of wider re-evaluations of their operations and their Polish subsidiaries were not significant to overall revenues. As a result, Getin Noble was able to obtain very tight pricing.
"We acquired GMAC Bank for less than book value, and Allianz Bank for about half book value. We had to be satisfied that this will earn money not just in the future, but at the moment of acquisition. This is the reason why, when we participated in the bidding for WestLB and AIG Bank, we did not raise our offers," says Krzysztof Rosinski, Getin Noble Bank's CEO.
The GMAC package includes its car dealership finance business, and Getin Noble concluded that the bank's profile would be suited to create a specialist SME lender, which it has renamed IDEA Bank. This coincides with the group's wider strategy of creating specialised bank brands to achieve the best customer segmentation and service level. Getin and Noble were merged in early 2010, but the two brands remain separate at the branch level, with Getin focused on mass market retail activity, and Noble as a 10-branch private bank and wealth manager.
"What you see in the branches remains the same after the merger. The difference is in the back-office operations, which are all in a merged headquarters, so we have smaller costs, bigger scale, and better positioning for financing and managing debt," says Artur Wiza, the CFO of Getin Holding, the bank's listed parent company in which leading Polish entrepreneur Leszek Czarnecki owns a 56% stake.
At the time of going to press, Greece's EFG Eurobank was close to announcing a deal to sell Polbank, its Polish network of 300 branches. Italy's Intesa Sanpaolo and Austria's Raiffeisen had both confirmed they were among the bidders. However, the takeover process could be complicated by the fact that Eurobank never obtained a full banking licence in Poland – Polbank operates under a foreign branch licence only.
A hard sell?
Another bank in a peripheral eurozone market where funding is challenging is Portugal's Millennium Bank, which owns Poland's eighth largest bank by capital. Millennium also has a subsidiary in Greece that faces difficult market conditions. As Mr Derylo of Wood & Co points out, the strength of the Polish economy and high valuations available for many assets pose a dilemma for troubled parent banks that have meaningful market share in Poland.
"Polish banks might well be attractive to buyers, they could be the group's most saleable asset. But they are also the main profit generators and often net liquidity providers for many of the foreign banking groups operating in Poland, so selling them would still be something of a last resort," he says.
Two other banks that required substantial government support, Belgium's KBC and Germany's Commerzbank, also own majority stakes in two of Poland's top 10, Kredyt Bank and BRE Bank, respectively. In both cases, the foreign parents have so far identified their Polish operations as core to their strategies.
"From our perspective, there are no uncertainties whatsoever. KBC declared while negotiating with the European Commission that its strategy is to develop business in its core, home markets where it owns both a bank and an insurance company – in Poland, that means Kredyt Bank and the insurance company Warta. And our bank works with mainly retail and SME segments, which fits very well into the revised strategy of KBC," says Kredyt Bank CEO Maciej Bardan.
BRE Bank CEO Cezary Stypulkowski's response to this question is more textured. He says he wrote a letter to all staff when he joined the bank as CEO in October 2010, emphasising the role of the majority shareholder because he knew the bank's ownership would be a subject of concern.
"For Commerzbank we are the biggest operation in CEE, its second home market. Annual German exports to Poland are worth about €35bn, and 40% of Polish trade is with Germany, so there are obvious natural links. Commerzbank provides BRE Bank with a stable and relatively cheap source of funding, while margins in Poland are still better than in Germany. So Commerzbank has more solid ground than many other European banks to stay in Poland. But I also told staff that we should be realistic – in today's world, nothing is necessarily for ever," says Mr Stypulkowski.
War for deposits
Given the uncertain future, the local funding position for all banks in Poland is critical. Many banks that had previously made use of parent or wholesale funding pushed hard to raise zloty deposits as the crisis set in. Bank BPH, almost 90% owned by GE Money, reduced the zloty funding from its parent over the first three quarters of 2010 from 4.2bn zlotys to 1.3bn zlotys. The cost of funds on the deposits was about 240 basis points (bps) lower than on the credit lines, significantly improving margins for the bank.
But for many Polish banks, the fight for deposits eroded margins. Slawomir Sikora, CEO of Citi Handlowy, says some banks were tolerating negative interest margins as high as 150bps on new deposits, simply to raise liquidity ratios. By contrast, Handlowy has a loan-to-deposit ratio of 70%, partly driven by funding from its market-leading global transactions services franchise, so it was able to avoid the deposit war.
Two former senior Handlowy executives both say the low loan-to-deposit ratio is also a product of the very tight rein that Citi has kept on credit processes at its Polish subsidiary – perhaps too tight. The decline in Handlowy's market share suggests an ultra-conservative strategy. In the decade since Citi purchased a majority stake in the bank in 2000, Handlowy has remained Poland's third largest bank by capital, but measured by assets it has slipped from third to sixth, now more than 30% smaller than the fifth largest asset base (Bank Zachodni). But the crisis has perhaps favoured Handlowy's conservatism, and Mr Sikora says the bank has great capacity to build its asset base as investment recovers among corporate clients.
"Our relationship with Citi today is built on trust that was verified during the crisis. This was and is important, because we are unique on the Polish market, as the only embedded bank with a countrywide network, able to deliver global financial products and services to Polish clients," says Mr Sikora.
War for customers
Other banks with low loan-to-deposit ratios and high capitalisation are also in a strong position to advance as economic growth picks up. These include the country's two largest banks, 51% state-owned PKO Bank Polski (PKO BP) and UniCredit's Pekao, but also the savings-oriented ING Bank Slaski. The challenge now is where to lend the funds.
"In the time of the slowdown we decided to be active with regard to our main competitors, and we picked up good clients from their portfolios. Now as the economic situation has improved, competition is increasing," says Zbigniew Jagiello, CEO of PKO BP. The bank added 10bn zlotys to 15bn zlotys in assets per year during the past two years.
Demand from Polish retail borrowers is rising again, but many corporates are "as liquid as I can remember them at any time" according to Mr Stypulkowski, allowing them to fund investment without much need for bank credit. Ambitious infrastructure investment programmes undertaken by central and municipal governments should provide a significant source of credit demand, especially as the country prepares to host football's European Championships in 2012.
"We have such a big balance sheet and such a high capital ratio that we participate in all large projects related to Euro 2012. We also provide financing to municipalities enjoying EU money and borrowing money from the banks to improve their local infrastructure. We won almost 70% of the municipality credit tenders we took part in last year," says Alicja Kornasiewicz, CEO of Bank Pekao.
According to Malgorzata Kolakowska, CEO of ING Bank Slaski, which has a municipal finance market share of 8.5%, demand for infrastructure investment is likely to remain high beyond Euro 2012. Municipals will need to continue upgrading transport systems, while the power sector, which is undergoing privatisation, must modernise and increase capacity. But Ms Kolakowska sounds a note of caution on Poland's efforts to bring down a budget deficit of about 7.9% of GDP.
"We have a stream of EU funds coming into Poland that is very positive, but for many of these investments you need co-financing from local and central government units, so the budgetary position will also be very important," say Ms Kolakowska.
Crowded house
Beyond infrastructure finance, competition is becoming severe, because many banks are now focusing on the same segments. BRE Bank, Bank BPH, Pekao and Kredyt Bank are all increasing their attention on mid-sized corporates. Citi, Pekao, PKO BP and Bank BPH all believe they can increase brokerage revenues by making better use of their banking networks. And almost every retail bank is trying to step up zloty-denominated residential mortgage lending to more affluent customers. Richard Gaskin, the acting CEO of Bank BPH, recalls the bank advertising a new retail loan product in 2010, and discovering that another 12 banks were launching similar products at the same time.
"The retail space is going to be incredibly competitive, particularly because many banks have decided not to go so deep in the future, everyone wants to serve the top end of the market. Speed of product development and innovation is going to be crucial. And since the prices of banking services tend to even out, banks increasingly compete on customer service quality standards," says Mr Gaskin, who was nominated to the CEO role permanently in December 2010 by the bank's supervisory board, subject to regulatory approval.
Inevitably, this competition raises the question of further consolidation in a market where the top 10 banks still only have 65% market share between them. The obvious candidates to make acquisitions are PKO BP – which made an unsuccessful bid for Zachodni – and Pekao, which has an 18% Tier 1 capital adequacy ratio. But Mr Jagiello says PKO's rapid organic asset growth means the bank will need to choose any acquisition carefully.
"We are not hungry to look at very small targets. We have to focus either on deal sizes that are more than 20bn zlotys, or on assets that are unique from our perspective, in that they broaden our portfolio of assets or products," he says.
