Credit Suisse's Madrid-based FIG team's input into Bank Zachodni's all-share merger with KBC's Kredyt Bank has allowed Santander to build the market presence it wanted in Poland without putting the squeeze on its capital ratio. 

Poland has long been a magnet for foreign banks, which now own two-thirds of its banking sector. Recently, however, troubles elsewhere in Europe have created more would-be sellers than buyers of Polish institutions. Spain’s Santander turned this to its advantage in its capital-lite acquisition of a majority stake in Kredyt Bank, advised by Credit Suisse’s Madrid-based financial institutions group (FIG) team, alongside Citi.

Poland is one of the few bright spots in Europe at the moment. The only EU and Organisation for Economic Co-operation and Development country to escape recession during the crisis, its economy grew by 4.3% last year. Its relatively open economy and stable political environment add to its attractions for expansion-minded banks such as Santander. “Santander sees Poland as being like Spain 25 or 30 years ago,” says Fernando Maldonado López, co-head of Credit Suisse's investment banking division in Spain and Portugal. “It has good growth prospects, and it is less penetrated than others from a banking perspective.”

Poland has the largest share of banking assets in the 'new' EU countries – central and eastern Europe – with about 35% of the total, according to Credit Suisse. And yet Polish banking assets as a proportion of gross domestic product are currently only 53%, compared with 75% in Hungary, for example. The obvious prospects for increasing those numbers have not been lost on Western banks. Yet, until recently, there were virtually no candidates for sale. And the reason why there are now more opportunities is the same reason that few can afford to take them.

“In January 2011, there were plenty of European buyers keen on Poland,” says Mr Maldonado. “The issue was that there were almost no assets available, and those that came up went for a very high price. With the extended sovereign crisis in the second half of 2011, buyers started retrenching. Valuations went down as more people wanted to sell, and we found ourselves representing the only real buyer for Polish assets.”

Expansion strategy

Keen to reduce its dependence on its ailing domestic market, Santander has been expanding aggressively in both emerging and developed markets. Last year it paid €4.3bn for Poland’s Bank Zachodni WBK, buying Allied Irish Bank’s (AIB) 70% stake as well as mopping up minority investors. The bailed-out and nationalised Irish bank was a forced seller and had put up its stake for auction in 2010. Santander managed to beat off an offer from BNP Paribas and a government-supported bid from Poland’s PKO Bank Polski.

Santander sees Poland as being like Spain 25 or 30 years ago. It has good growth prospects, and it is less penetrated than others from a banking perspective

Fernando Maldonado López

However, Santander had not yet had its fill of Poland. Its aim is to have at least a 10% share of its core markets and Bank Zachodni, while Poland’s fifth largest bank, did not quite get it there. So it kept looking. By now, more properties were coming onto the market as, like AIB, other straitened foreign owners looked to slim down their balance sheets. One obvious candidate was Bank Millennium, majority owned by Portugal’s Banco Comercial Portugues, which was feeling the strain back home. Another was Kredyt Bank, slightly smaller than Bank Zachodni in terms of assets but with significantly lower market capitalisation.

Kredyt Bank was majority owned by Belgium’s KBC, which after a €7bn government bailout was required by the EU to sell non-core assets. A year earlier, it might have been mobbed with offers. But banks that had previously shown an appetite for Polish acquisitions, such as BNP Paribas and Intesa Sanpaolo, were drawing in their horns. Commerzbank, which had been keen to add to its Polish interests, has troubles of its own and is being obliged by the EU to desist from any takeovers for a period of time. Russian banks such as Sberbank and VTB, on the other hand, have shown themselves eager for Polish assets. Their problem is that in view of the past one-sided relationship between their two countries, the Polish government may not want them. Poland’s tough-talking bank regulator might also be deterred by Russian banks’ poor track record on corporate governance.

Tough decisions

Hoping to avoid an auction, Santander began direct negotiations with KBC in the middle of 2011, with Credit Suisse and Citi as its investment banking advisors. The negotiations would grind on until February this year. “Kredyt Bank was not the only asset in the market,” says Armando Rubio Álvarez, a Madrid-based director in Credit Suisse’s FIG team. “We looked at them all and Kredyt Bank stood up as a very attractive option. But Santander was not willing just to pay any price.”

Price was not the only thing on Santander’s mind. The bank has been building its core capital ratio up to a self-imposed level of 10% and was determined that any deal should disturb this as little as possible. “Santander is very cautious and prudent in the management of its business,” says Mr Maldonado. “It wanted to buy in Poland, but it also wanted a minimum impact on its capital ratios at group level.”

There were other challenges, not least Kredyt Bank’s significant mortgage portfolio denominated in Swiss francs. These products were actively marketed by a number of Polish banks a few years back and proved popular with homebuyers. However, the subsequent strengthening of the Swiss currency has put considerable pressure on borrowers and made such portfolios a very specific risk.

Deal done

By the end of February the parties were finally able to announce an all-share deal. Bank Zachodni is to merge with Kredyt Bank, creating Poland’s third largest bank by deposits, loans, branches and profits. Valued at about €5bn, it will have nearly 900 branches and 3.5 million retail customers. Kredyt Bank shareholders will receive 6.96 Bank Zachodni shares for every 100 shares they own.

Following the merger, Santander will have 76.5% of the new bank and KBC about 16.4%. KBC intends to dispose of its remaining stake. It will sell that stake below 10% in the near future and Santander has committed to helping the process either by finding a third-party buyer or, at worst, buying some of the shares itself. The European Bank for Reconstruction and Development (EBRD) gave its seal of approval by agreeing to buy €80m-worth of new shares in Bank Zachodni after the merger was announced. If the merger goes through, it will leave EBRD holding about 1.5% of the enlarged entity.

The EBRD investment and, of course, the deal itself both hinge on regulatory approvals, most importantly from KNF, the Polish financial supervision authority. The regulator has made it clear that it expects Santander itself to list in Warsaw as part of the package. It did the same when Italy’s UniCredit bought a stake in Pekao. “I would like the freefloat of the combined bank to equal at least 25%,” Andrzej Jakubiak, the head of KNF, said in March. “Another condition is that Santander controls the banks directly, without middle companies.”

A satisfying conclusion

Both parties seem satisfied with the transaction. “The main objective was to minimise capital dilution and achieve a good outcome for KBC, and this will be achieved with the deal’s design and the support of co-investors,” says Mr Rubio. “As the best bank integrator in the world, Santander will also be able to extract significant synergies.”

The two banks have a considerable number of overlapping branches, so the bulk of the synergies will come from branch closures. Other benefits should come from cross-selling opportunities. “The merger will generate a return on investment of nearly 18%, accretive from year one,” adds Mr Maldonado.

Kredyt Bank is being acquired at 1.4 times book value. Since some analysts had predicted it would fetch no more than 1.2 times book value, that is a plus for KBC. Yet Santander bought Bank Zachodni for 2.4 times book value, which shows how prices have fallen in only one year. 

Taken together with its existing Polish consumer finance business, the merger will give Santander its sought-after 10% share of the country’s financial business volumes. It will have 9.6% of deposits, 8% of loans and 12.9% of all branches. Even more importantly, it estimates that the impact on group core capital under Basel II will be no more than five basis points.

“This is a smart way to buy a business,” says Mr Maldonado. “You get synergy and use very little of your own capital.”


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