HSBC tipped as BRE merger talk hots up
HSBC - Hong Kong Shanghai Banking Corporation - originally exerted most of its leverage in Europe in the United Kingdom, after acquiring a large share of the market by purchasing the former Midland Bank in 1992. It is now active in France, the USA, Brazil, Argentina, Switzerland and Luxembourg, with 7,000 offices worldwide in 81 countries and has global market listings.
Balanced growth
The bank has a policy of "balanced growth" in both developed economies and emerging markets. Warsaw analysts believe BRE could prove tempting bait at a bargain price as the banking sector approaches a new round of consolidation.
HSBC went on the acquisition trail early in 1960s, at first in Asian markets neighbouring the then British colony. In 2000, CCF - Credit Commercial de France - became the bank's first major foothold in the Eurozone.
Merger talked also focussed on other operations, including France's Societe Generale, Citibank, Deutsche Bank - which is specifically targeting Poland for expansion - and BPH PBK. A source inside BRE said it could be "just the bank for an investor who so far has a low exposure to capital market operations here."
To survey the banking scene is to discover something like an under-developed colossus. On the one hand, there is immensely sophisticated and rapid rollout of online virtual banking services on a scale which is impresive when judged against standards set by far more advanced EU countries. On the other hand, there is the tepid response of the great majority towards the provision of retail banking services, which in turn deflects the banks towards more profitable and specialised value-added services for corporate and investment clients.
To many observers it looks lopsided. The National Bank, regulator of all banking activity, thinks so too. Its latest report on the subject confirmed that banks were turning their backs on personal clients, except for those, still the minority, who are wired online. It then begs the question, with the stampede to be first and foremost in the provision of corporate banking services in the new EU Poland, which banks will survive in what all analysts predict will be an inevitable new flurry of mergers and takeovers?
The future of BRE and its troubled German partner Commerzbank is the subject of immense speculation. In recent weeks, BRE has been married off to every other bank in town, but there's still no formal ceremony.
"It's basically a good bank, with a very interesting corporate client base and a quality retail franchise, but the failed attempt to merge with Bank Handlowy, then the troubles at Commerzbank - which is clearly no longer much interested in Poland - influence the sentiment about its survival," said one senior economist. He added: "There's also some concern over the bank's exposure to Brazil and the fear that country may go belly-up. If I looked a few years ahead, I don't expect to see BRE still there, not in its present form anyway."
The point was taken up by a top banker looking at the scene from his own niche position: "I have never understood what interest Commerzbank ever had in half a Polish bank. It's been illogical from the start. If I was Commerzbank, I would be inclined to get rid of it immediately. The question then is to who?"
Some market watchers believe it's only a question of time before one of the Big Four British banks, which have so far had Poland in quarantine, breaks ranks. A British bid for BRE? Grzegorz Zawada, a banking analyst at Erste Securities, thought it would be "great" to see one of the British majors such as Lloyds, Barclays or the global HSBC (Hong Kong Shanghai Banking Corporation) on the regional market, which they had so far espoused in the name of risk management and supporting equity performance through strong domestic retail demand.
Zawada agreed that BRE appeared to be at the centre of a Copernican model of the local banking system: BRE as the glowing central orb with all the other banks revolving around it in concentric orbits until one felt an irresistible magnetic attraction towards a merger or takeover.
"It's definitely the weakest, making a big play to get into the retail sector but probably too late," he said.
Further, doubts about the bank's future did not flow entirely from the problems in the overcrowded and slowing German market.
"These people were big-time gamblers which led in the end to a string of unwise investments in the high tech sector," Zawada said. "If they had won, they would have won big. This wasn't the equivalent of a diversified portfolio - so they lost."
As an example, Zawada guessed BRE had bought into Netia at zł. 100 per share and subsequently lost a packet.
He pointed out to the bottoming share price and investors becoming increasingly concerned at the losses as factors which would increase the pressure for a change of regime. But where are the potential marriage partners?
Unicredito, which has 52% of Pekao, has formally denied any desire to mate with BRE. While conceding it is not a perfect fit, analysts still detect some strong magnetic forces at work, such as matching Pekao's traditionally domestic corporate service with the much more international portfolio at BRE, plus BRE's innovative concepts in the e-banking sector. But few see it as a realistic runner. Then comes Germany's HVB Bank, holder of 70% of BPH PBK, with rumours in the market of settlement issues between HVB and Commerzbank in which BRE might come into play. Netia shares have been trading around zł. 2.4
Zawada summoned France's Societe Generale as an outside contender from one of the more distant orbits. While still a relatively weak force on the Polish market, Societe Generale had turned into a major force in Czech corporate banking. Here it would be unlikely to make any significant advance on its corporate presence without making a strategic acquisition. In the end and in the face of its denials, Zawada thought the 19% market share of Pekao tagged onto BRE's 4% made compelling sense, with the proviso that the government's reluctance to set Pekao entirely free represented a significant obstacle, but "sooner or later" it would end up as part of a large international group.
And that presumably, would do much to modernise the structure of a bank which although the country's biggest retail operation and likely to post profits of about €250 million (zł. 1 billion) this year, nevertheless had to create reserves of €113 (zł. 550 million) to paper over bad loans, with possibly more provisions to come.
At Commercial Union, a significant shareholder in BRE, analyst Marek Jura said shake-ups in the German financial sector would make an impact on the bank next year. He does not share the pessimistic scenario of a shortage of takers. Deutsche Bank had already announced it has three target markets in its sights - Spain, Portugal and Poland. Societe Generale was "definitely looking for something" to boost its modest presence in the country, and an HVB arrangement with Commerzbank would unquestionably encompass BRE. And then ING would be looking closely at the forthcoming round of acquisitions and mergers to expand its presence. Citibank might also be interested.
Jura also raised the British connection. Rumours around the town he had intercepted indicated HSBC, which arrived in Europe via a takeover of a major British bank, the Midland, which came perilously close to collapse, was scouting in the region. HSBC's focus on Midland indeed offers important clues as to its expansion policies, always looking for basically sound banks which are in strategic difficulty and, as one analyst commented, "they can then pick up cheap". A spokesman dealing with overseas investments at HSBC headquarters in London would neither confirm nor deny a possible move into Poland.
Unsurprisingly, speculation is rife inside the massive structure which dominates Plac Teatralny. A well-placed contact told the Business Journal that since everyone had decided BRE was a bank to be bought, it was 50-50 that would now happen. The source pointed to potential attractions for BPH PBK, particularly in the event of strategic realignments in the German market. Against that he placed the ongoing process of HVB's merger digesting Bank Austria Creditanstalt, which had left the combined group with perhaps the same market value as before. HVB, Germany's second largest bank, is certainly preocupied with domestic distraction, having just posted a quaterly operating loss due to pressing loan write-offs. And new chief executive Dieter Schmidt is not yet in place. Among the other local hunters, analysts proposed that BZ-WBK might also be interested, describing it as a good operation which presently lacked the capital markets added value BRE could provide.
The whole debate about BRE is against the background of sweeping changes in the banking scene, especially among the majors, which everyone in the industry agrees will start to unfold during 2003. At the end of this process, the top 15 operations will be culled to around half a dozen, providing the country with tougher but leaner banks ready for more challenging market conditions inside the European Union. Economies of scale, long overdue, are another driving force. Improved profits are currently being almost entirely consumed by rising costs.
Foreign investors now dominate more than 80% of the banking structure in the country. A change of ownership at BRE influences only the half of shares not in Commerzbank hands. The much bigger prize is PKO once - and if - it is prised from the grip of the Treasury. That would relegate the present scramble for BRE Bank to the status of a minor skirmish.
