Emerging Europe’s banking sector is set to offer opportunities for banks to snap up assets from western rivals or homegrown lenders facing bad debt.  Consolidation ground to a halt by 2007 when a decade-long acquisition and privatisation rush dried up at high prices that reflected bumper credit and profit growth rates in the region. But a window of opportunity will open for buyers active to clear balance sheets or turn their focus back to domestic markets.

“There is a number of banks on sale at least informally,” says Debora Revoltella, head of strategic analysis at Italy’s UniCredit.

“And there is a number of banks which didn’t enter the region before because they missed the boat to build a franchise. Those could include Deutsche Bank or Spanish banks,” she said.

Some of the big names who lost out on emerging Europe balked at prices which topped out in 2006 and 2007, but they may find better value now.

“The banking landscape will be different in three years’ time,” said Cristina Marzea, an analyst of emerging European banks at Merrill Lynch.

Hardly any bank active in the region is now trading at more than twice book value, with some still lingering at less than book value according to reports.

“Whoever has cash now will get quite some opportunities, I’m not saying lifetime opportunities, but there are interesting assets at interesting prices,” Marzea said.

Western banks own the biggest lenders everywhere in the former Communist part of Europe apart from the former Soviet Union and Hungary, which has produced the only homegrown lender active across the region, OTP.

EU, market pushes for sale
Investment bankers and analysts looking at the region say that the banks which have sounded out possible buyers fall into three main categories.

The biggest chunks could come up for sale because the EU may demand western banks scale back business as a condition to approve state aid they received.

This could happen to Germany’s BayernLB, which owns Hungary’s fourth-largest bank MKB and, through its Austrian unit Hypo Group Alpe Adria, some of the biggest lenders in the former Yugoslavia. Together, BayernLB’s emerging European banks have assets of €29 billion.

The EU is walking a fine line between ensuring competition on the one hand and financial stability in the region on the other.

A firesale of assets under EU pressure in some of the worst-hit countries could undermine efforts to stabilise the region. However, if a major new name were to buy into it, this could also be seen as a vote of confidence.
A second group of possible sellers include those who may not be under regulatory pressure but need to clean up their balance sheets and refocus business and management issues.

“Everybody who is sub-critical mass is going to have another look at its strategy in this market,” said one investment banker who declined to be identified because he is advising clients in the region. “If there is no network, no strategy, this is just eating up management time and doesn’t go anywhere.”

This includes RBS’s Romanian business, Citigroup’s Polish arm Bank Handlowy, Allied Irish Bank’s Bank Zachodni WBK and Commerzbank’s BRE Bank.

These Polish banks have market capitalisations between $5 billion and $6.5 billion.

Finally there are locally owned lenders such as Romania’s Banca Transilvania, market cap $400 million, where pressure on owners to raise capital may accelerate a sale that analysts have pencilled in.

Growth to return, prices low
Despite the region’s bad press at the moment – a deep economic contraction and financial stability risks because of widespread lending in hard currencies – it is poised to get back on track.

The region’s allure for western banks lies in the fact that millions still do not have access to basic banking services.
Analysts have long noted the nearly complete absence of Deutsche Bank in the region – apart from some Russian business – and the German lender is currently looking at some of the assets on the market, investment bankers said.
The same is true for Banco Santander and HSBC with their experience in emerging markets. Among the banks who are already there, those with strong balance sheets like Intesa Sanpaolo and Societe Generale or those who just raised fresh cash like National Bank of Greece or Poland’s state-controlled PKO BP could use the opportunity for bolt-on acquisitions.