Banking on buyouts

Aleksander Nowacki examines possible purchases in the retail banking sector

If the old saying that you should not believe a rumor until it has been denied is anything to go by, we are in for a wave of pullouts in the country's overcrowded retail banking sector.

"You hear these rumors all the time," said Grzegorz Zawada, a market analyst at Erste Securities Polska. "People are speculating that maybe WBK BZ will go on sale, maybe Millennium, maybe BRE Bank. And then you get all these denials. Nothing is known for sure."

So when Maciej Stańczuk, president of WestLB, announced last week that his company had been contemplating a takeover of a retail bank since last year but could not find "an appropriate institution," the only surprise was that the company had waited so long.

WestLB is not the only institution with such plans. Industry experts do not rule out the possibility that the bank will find itself in competition with HSBC, as both could make bids for state-owned PKO BP, in the event that the government finally goes ahead with its privatization.

HSBC has already indicated that such a bid would be placed. One of the bank's officials was reported as saying that it was the institution's policy to either have a very small, specialized operation in a country, or to rank among the top three market players. According to Zawada, that only leaves PKO BP as a takeover option.

"It is the only way they could build that sort of position on an already overcrowded market," Zawada said. "The future of the sector is consolidation and specialization. Some entities will be forced out of the market. You cannot make a profit if you control less than 1% market share."

Zawada said he has no doubt that the number of entities will be reduced as the market develops. That is not, however, to say that there is no room for new entrants.

"For a giant such as HSBC it is never too late to enter the market," Zawada said. "But if it is not happy to be a middle-range player, there is no way to achieve (market leadership) except by buying PKO BP. There is no other institution that could guarantee this sort of market share."

Missed oportunity

The goal that HSBC has set for itself will require considerable investment outlay. It is clear that a global player on such a scale is hardly going to be intimidated by prospects that would discourage a lot of smaller companies, but observers seem to agree that the timing is far from perfect.

"My impression is that they have missed the right moment," said Artur Szeski, an analyst at CDM Pekao. "A few years back it was possible to do things relatively inexpensively, but those things will now cost a lot more to do. It is always easier to attract a new customer than to prize him away from the competition. My guess would be that (HSBC) overlooked this country's potential until recently and has suddenly woken up to it." It may have something to do with European Union accession, Szeski said, an event which has brought the country into the international spotlight.

It may also be that investors are getting carried away because of global conditions that have been favoring buyers in the banking sector. Prices have plummeted in the face of relatively poor financial results reported by banks worldwide. At the beginning of this year, Germany saw assets change hands for barely a third of their book value, a price so low as to be almost unheard of in that country.

"There is a disparity between global and local trends," Szeski said. "It is a good time for buyers worldwide, but over here the moment is clearly past."

It is not that the domestic banking sector fared better in 2002 than was the case elsewhere. What makes for the disparity is that the market has developed at a rapid pace although there is still a long way to go.

"The point is that if you wait any longer, there will be nothing to buy," Szeski said. "In the near future all the spoils will have been meted out."

In good shape

Retail banking is in much better shape than other market segments, so much so that some have suggested that an institution such as PKO BP could benefit from getting rid of its corporate client base and concentrating on products offered to individuals. Charges for these products are twice as high as is the case with corporate clients.

"In theory I could imagine a bank concentrating on individual services alone," Szeski said. "But it would not make sense in this country. Not while the sector is plagued by overliquidity."

Szeski pointed out that directing all their financial assets to individual products would force banks to extend their services to an increasingly wide client base. If the current problem with corporate clients is a high number of bad debts in this segment, the answer is not to attract increasingly unreliable individual customers. Such a strategy would also have an adverse price effect.

All this does not make the retail sector any less attractive. Even those banks that are currently struggling have plans to expand their operations in this segment of the market, as the case of BRE Bank demonstrates. BRE's embattled owner, Germany's Commerzbank, has been badly hit by a downward trend in that country's banking market and its troubles have had an effect on its Polish operations. The one part of the holding that has not been affected is mBank, the country's first and largest Internet bank, which plans to expand its client base to 500,000 by the end of the year. The plans are not unrealistic, as last year mBank accounted for nearly half of all new individual deposits in the entire sector.

A few giants

Zawada anticipates a coming wave of consolidation, saying that the future belongs to a few giants and a number of specialized middle-range players.

Szeski is not so sure, however, noting that the country's market is no less consolidated than in some of the more developed countries, such as Germany. But he agrees that retail banks will become increasingly specialized. He also sees the potential for other institutions to conduct operations similar to those of banks, as can be witnessed by Poczta Polska's recent efforts to enter the financial services market.

"But these 'new' services are not substantially different from what Poczta is doing already," Szeski said. "What will change is the way they market (these services). It will be the old product under a brand new name." Poczta Polska may well become a major provider of financial services in more remote areas, but it is unlikely to be a challenger to the main players in the retail banking sector.

"Cooperative banks are right to be angry at Poczta's expansion plans," Szeski said, referring to recent statements by the National Association of Cooperative Banks. "It is competition for them. The major commercial banks will not be affected. There is not much scope for change in the principal segments of the market."

For that reason the success of HSBC's plans for the market depend on the future of PKO BP. It is interesting to note in this context the recent statement by Zdzisław Montkiewicz, president of state-controlled insurer PZU, that his company could merge with state-owned PKO BP to form the largest financial group in the country. Montkiewicz's plans may have something to do with a contract to buy shares from minority shareholders in PZU, which, according to analysts, he is now known to have signed with HSBC. The deal, worth €1.3 million (zł. 5.65 million), caused a furor and led to the resignation of treasury minister Sławomir Cytrycki, but its most interesting aspect is that it could be seen as a prelude to the formation and eventual privatization of Montkiewicz's financial group. Should such a development take place - though its likelihood appears to have been already diminished by the political controversy over the issue - HSBC may yet have a larger role to play in the process.