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UniCredit steals a march on the competition

Italy’s UniCredit has bolstered its presence in the ‘new Europe’ with its purchase of HVB. But, as Nick Spiro reports, integration will present it with a real challenge.
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On the face of it, Alessandro Profumo, chief executive of Italy’s UniCredit, has pulled off a masterstroke in central and eastern European (CEE) banking. By shelling out €15.8bn in June to acquire Germany’s HVB, he has not only clinched Europe’s largest cross-border banking deal, but also created the biggest player in the ‘new Europe’.

The merger of UniCredit’s assets in the region, which account for one-fifth of the bank’s net profit, with the prized central European operations of HVB’s Bank Austria subsidiary, will create a CEE banking powerhouse. It will have twice the number of branches and assets and more than double the profits of Belgium’s KBC, formerly the largest banking group in the region. According to a report by Morgan Stanley, operations should generate more than €1bn in 2006, a quarter of the combined UniCredit-HVB group’s earnings.

Rationale approved

The strategic rationale of the Italian lender’s acquisition received Merrill Lynch’s approval in a recent note. “A few years ago, the emerging market consequences of mergers were secondary and at most a fortunate side-benefit. Today, exposure to the emerging European ‘tiger’ economies is very much in the driving seat. There are [many] reasons for two ‘emerging-rich’ banking groups to seek each other’s company,” it says.

While the new UniCredit-HVB group, according to Morgan Stanley, will be “a cash cow in Italy and [provide] restructuring [opportunities] in Germany and Austria”, the “growth [is clearly in] central and east Europe”. A recent presentation by UniCredit revealed that loans and deposits in the new EU in 2003 still only accounted for 68% of GDP, compared with nearly 200% in the old EU 15. For every 1000 central European inhabitants, there are only 350 credit cards, compared with 1250 in the EU 15, and there is still huge potential for growth in insurance, pension funds and mutual funds.

UniCredit-HVB would be present in 10 emerging European countries, including Russia and Turkey, giving it an enviable geographic reach that is second only to Austria’s Raiffeisen International (present in 15 countries). The new group would become the leading bank in Poland and Bosnia-Herzegovina, and bolster its already dominant position in Bulgaria and Croatia. Yet, as Merrill Lynch notes: “The merger does very little to plug the strategic gaps in the Czech Republic and Hungary, where both banks are weak.”

The deal is also a vote of confidence in European integration, after French and Dutch voters emphatically rejected the EU’s new constitution. One industry expert who is familiar with the deal says: “The timing was impeccable. This was Profumo at his best, showing the eurosceptics that, at least in business, there is such a thing as pan-European consolidation. Even in Germany, where three months before parliamentary elections one could have expected some resistance, there was no backlash – quite the opposite.”

Polish challenge

The regulatory hurdles of the merger lie mostly in Croatia. Zagrebacka Banka, Croatia’s largest bank in which UniCredit has a 82% stake, already has a 24% market share in loans and 30% in deposits. Adding HVB’s 9.4% market share through its Splitska Banka unit would almost certainly fall foul of anti-trust regulations. Merrill Lynch expects UniCredit to sell Splitska, for which it is likely to find “a willing queue of buyers”, including OTP, Hungary’s leading bank.

In Bulgaria, although anti-trust issues seem unlikely, an oligopolistic market structure will probably emerge, pitting UniCredit’s Bulbank subsidiary and HVB’s business (which together account for roughly 22% of the country’s banking assets) against OTP’s DSK unit, which has a 13% market share and more than a third of the buoyant mortgage market.

Polish profits

The merger’s impact on Poland is marked. Merrill Lynch notes: “The emerging European aspect of an HVB-UniCredit deal clearly revolves around Poland.” The revenues of Bank Pekao, Poland’s second largest lender in which UniCredit has a 52% stake, account for nearly half of the Italian bank’s EU profits. The revenues of BPH, Poland’s third biggest bank in which HVB’s Bank Austria has a 71% stake, account for more than a third of Bank Austria’s profits in the region. A Pekao-BPH tie-up would create Poland’s largest bank with 21% of the sector’s assets, 22% of the sector’s loans and nearly 30% of the booming mortgage market.

However, savings giant PKO BP, which was previously Poland’s largest bank with 16.5% of the sector’s assets, would still have the highest share in mortgages, and a slight edge in deposits and the number of branches. “PKO would no longer have a commanding position but would still be number one in certain segments,” the industry expert says.

While a Pekao-BPH merger is almost certain to take place, it would take at least two years to execute under an optimistic scenario. The prospect of both banks merging has already riled trade unions at BPH, which fear that thousands of jobs would be lost as branches close. “In terms of synergies, the savings are in branch overlap, IT, back-office functions and the headquarters of both banks. The costs of management are very high,” says the industry expert.

Different cultures

Such a merger is likely to prove awkward. Not only are both banks efficient and well-managed, having gone through aggressive restructuring in the past several years, but they also differ profoundly in their cultures. Pekao is a typically Anglo-Saxon bank, focused on profitability and cautious in its lending; BPH is a more aggressive Austrian-style lender focused on growth – particularly in mortgages, with the bulk of its lending in foreign currency.

“The clash will revolve around risk management, particularly in FX mortgages. No [Polish] bank should be lending in Swiss francs now. It’s madness,” the industry expert says.

A BPH-Pekao merger could also cost the pair market share, at least in the short term. Merrill Lynch notes: “If we imagine Pekao-BPH distracted by a complex integration, it may reveal opportunities for the smaller banks to grab material market share.” Poland’s medium-sized banks, such as ING, Allied Irish Banks’ BZ WBK and Commerzbank’s BRE, may feel compelled to join forces, creating further “disruption and lesscompetition”.

Brake on acquisitions

The challenge of integrating UniCredit-HVB’s operations may also prove contentious at the parent level. Bank Austria was apparently keen on bidding for a 62% stake in Banca Comerciala Romana (BCR), Romania’s largest bank and the last big prize in central European banking. However, Mr Profumo has suspended all acquisition plans for the next three years with a view to meeting UniCredit-HVB’s ambitious target of nearly €1bn in pre-tax synergies by the end of 2008.

The frontrunners for BCR are Austria’s Erste Bank, Italy’s Banca Intesa and Germany’s Deutsche Bank. France’s BNP Paribas and the Netherlands’ ABN AMRO are among the other short-listed candidates, which have until September 19 to submit binding offers for BCR.

Despite the uncertainties of integration, Mr Profumo has seized the initiative in central European banking. Previously, Austrian lenders dominated the region’s banking landscape; now an Italian-led bank is the undisputed leader.

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