BRE Bank more leery following Elektrim debacle

BRE Bank has adopted a more cautious investment banking strategy to avoid financing headaches like its "complicated" involvement with the financially troubled holding company Elektrim, Wojciech Kostrzewa, the bank's chief executive officer, told the WBJ last week. Poland's seventh largest publicly traded financial institution and its most aggressive investment bank, BRE made a name for itself through savvy deals such as the 1999 sale of a stake in mobile operator Polska Telefonia Cyfrowa (PTC) to Elektrim, yielding some zł. 500 million ($122 million). And last year, it sold a controlling stake in computer maker Optimus to ITI Holding for bonds convertible into the latter's equity. But recently investors have frowned on BRE by driving down prices and making the bank more volatile than its Polish peers. As a result, BRE is adjusting its approach. "You have to be more cautious," Kostrzewa said. "Of course, it's a different market environment." The depressed share price and unrealized gains from deals have even led to rumors that Kostrzewa would be ousted from his post. Kostrzewa denied that possibility. He also said the bank wasn't planning any big deals right now. "At the moment we are certainly not working on any investment of (Elektrim's) size," he said.

BRE initially invested an estimated $30 million into struggling Elektrim, intending to take hold of its choice telecom assets cheaply. But Elektrim's valuation has plummeted following it's default on €480 million in bonds last December and amid bankruptcy fears, both of which virtually guarantee that the bank won't be able to reap expected gains. The future of Elektrim and BRE's bottom line hangs on the bank's and Dutch retail and investment group Eastbridge's decision on whether to go ahead with the purchase of 49% of Elektrim Telekomunikacja, Elektrim's telecom subsidiary. A decision is expected on Aug. 15. Analysts said avoiding such deals would be the best course for BRE to take. "I think that it's a sensible thing to say to the market," said Artur Szeski, a banking analyst at CDM Pekao. "It turns out that not every transaction (BRE) takes turns a profit. I believe they will try to say they will be more cautious." Grzegorz Zawada, the director of research at Erste Securities in Warsaw, was less critical of BRE's investment banking record. "One might argue they have been successful (so far)," he said. "Talking about investment banking, they have made some pretty good deals." Zawada said that where BRE has gone wrong is by not fully taking into account that its shares would always be more volatile and cheaper than its peers. "They are actually complaining (to analysts) about being traded at discounts to Polish and Western peers," he said. Zawada also pointed out that as far as investors are concerned, BRE's business model is two-pronged: It's a stable commercial bank, but at the same time an aggressive and unstable investment fund.

And because investors are unable to separate the two, BRE's stock is more volatile than its peers since equity investors treat it as a riskier asset, which it is, Zawada said. "Investment banking is risky," he said. Kostrzewa agreed: "We believe that the investment banking market is by definition volatile and has ups and downs." Last Friday, the bank said it would have to scale back its 2002 earnings forecast from the zł. 371 million ($90.8 million) it had estimated in consolidated net profit. Even so, Kostrzewa is still looking for opportunities. "We still have our eyes open because of the present (depressed equity) prices," he said. The energy sector is one area where BRE is considering investments. The bank is leading a consortium to purchase a stake in the state-owned G8 group of energy firms. "We feel that this is something - the great last huge sector," he said. And even with BRE's more cautious approach, it still plans to stay at the forefront of investment banking in Poland. "It should stay as a core (business strategy) and should provide good income when the market recovers," Kostrzewa said. "The down market will not last forever."