Ukrainian banking: deal heat expected to move towards mid-tier targets over next 18 months - analysis

M&A in the Ukrainian banking sector will remain vibrant in the coming months with between five and seven deals completed in 2007, intermediaries have said.
However, deal heat is expected move away from deals involving top-20 banks and further towards the mid-tier banking sector, according to the same sources.
Speaking at the Adam Smith Institute’s Ukrainian banking forum in Kiev, Vitaly Struckov, managing director of Ukraine specialist boutique Concorde Capital, said he predicted a minimum of five transactions in the Ukrainian banking sector in 2007 with the total value of deals “probably exceeding USD 2bn”. Within two years all the major banking deals in the country would be completed, he added.

He noted that over the past three months between five and seven tenders had started for the sale of controlling stakes in Ukrainian banks but said his advice to would-be buyers is that mid-tier banks provide better value for money than the country’s remaining large banks.
He noted that top-20 banking deals were coming in at around 4x book value where average book value was around USD 100m. He added: “The question is, why pay such a high premium for a larger bank when you can buy a mid-size bank with a good platform, a good network, a good management team and inject USD 50-100m capital and in one year you can be in the top-20?”
He said he believed mid-tier banks would offer better value for money at circa 2-4x book value – although this would depend on the bank, the region, and the quality of the business.
A similar view was espoused by Dragon Capital director Brian Best on the first day of the conference when he said he expected the Ukrainian banking sector to be an attractive place for new external investors for the coming 12-18 months.

He added that he believed a further seven or eight deals would be completed by the second quarter of 2007.
In common with Struckov, Best said he believed the next step would be for smaller banks to become targets. He noted: “We'll also see further consolidation in the banking sector over the next year or so as foreign investors that have already bought banks in the Ukraine will look to acquire some middle-tier banks where they see that there are some synergies that can be gained.”

Foreign groups that have made such investments include Raiffeisen International (RaiffeisenBank Ukraine and Aval), Banca Intesa (Urkotsbank), Unicredit Group (HVB Ukraine and PEKAO Ukraine Bank), BNP Paribas (UkrSibBank) and Credit Agricole (Index Bank). Despite the optimism for further deals, a number of speakers at the conference highlighted the potential barriers to straightforward acquisitions.

Struckov noted that he believed of all the registered banks in the Ukraine not currently under foreign control only “between 10 and a maximum of 15… deserve to be targets for foreign banks”. He added: “There are many factors that make Ukrainian banks not attractive and far from easy to acquire.” He said his advisory currently had two sell-side mandates.

In her presentation to the conference, Jaroslawa Johnson, partner of law firm Chadbourne and Parke, indicated eight main factors of concern to foreign investors in the Ukrainian banking sector that could potentially break banking deals. They were a lack of transparency over shareholdings, the size or lack thereof of branch networks, a lack insight into a bank’s target business, the quality of loan and client portfolios, the quality of the target bank’s securities portfolio, the quality of the target bank’s fixed assets and a poor history of capital adequacy. Any of these factors could break a potential deal, she said.

Johnson noted that, on the buy side, her law firm had received five mandates. One transaction had closed, two transactions had signed but not closed and in two transactions the acquirers walked away after due diligence, she said.

On the sell-side, she said her firm had represented three sellers. One transaction was signed but not closed, a second seller was initially rejected but has since found a suitable investor and is going to proceed to due diligence; while a third seller saw its investor lose interest during due diligence.
The Ukraine has 166 registered banks, of which around 25 were at least partly owned by foreign investors as of April 2006.

Ukrainian banks that are understood to be currently up for sale or to have received expressions of interest from foreign bidders include Ukrin Bank, TAS Kommerzbank, Rodovoid Bank, Nadra Bank and Forum Bank.

by Geoff Spiteri reporting from Kiev

Unicredito and Banca Intesa: Ukrainian banking sector still attractive for M&A, senior management say

Unicredito and Banca Intesa are two foreign banks that could make further acquisitions in the Ukraine, senior management have said.

Speaking at the Adam Smith Institute’s Ukrainian Banking conference in Kiev, Adriano Arietti, head of M&A at Italy-headquartered Banca Intesa, said the market was attractive to foreign investors by virtue of “the size of its population, a growing economy and a degree of banking intermediation which is still pretty low in comparison with other central and eastern European countries”.

He added: “In the short term a lot of legitimate, strong foreign investors like [Banca Intesa] will buy into Ukraine’s second- and third-tier banks owing to the market’s attractiveness.”
Banca Intesa currently operates in the Ukraine through its 85% holding in Urkotsbank, which it acquired in February 2006.

In the same vein, Fedele di Maggio, chief operating officer of Unicredit Bank, said the integration of HVB and Unicredito in the Ukraine would be a priority for the immediate future. But he did not rule out further acquisitions if they suited the bank’s growth aims.

“We are still open to opportunistic buys if we find an acquisition candidate or a partner we are comfortable with,” he said. “That clearly would accelerate the speed of our expansion.”

Unicredito operates in the Ukraine through its Polish subsidiary Pekao, which in turn controls Pekao Ukraine Bank, recently renamed Unicredit Bank. Unicredito also operates in the Ukraine through the recently acquired German group HVB, which in turn owns 100% of HVB Ukraine.

A banking source contacted by this publication observed that Unicredito is “still looking to do a deal”, adding that it is being advised in its search for a suitable candidate by Rothschild. The source added that he thought – though he couldn’t confirm for certain – that Unicredito was involved in the bidding process for TAS Kommerzbank.

Ukrainian banks that are understood to be up for sale or to have received expressions of interest from foreign bidders include Ukrin Bank, TAS Kommerzbank, Rodovoid Bank, Nadra Bank and Forum Bank.

By Geoff Spiteri reporting from Kiev

BrokBusinessBank, Forum Bank, TAS-Kommerzbank and Ukrinbank seeking external investors, advisor says

BrokBusinessBank, Forum Bank, TAS-Kommerzbank and Ukrinbank are among the Ukrainian banks seeking to attract foreign strategic investors. Brian Best, director of boutique advisor Dragon Capital, said that an improving macroeconomic situation had led to "very high growth" in consumer spending, which in turn was one of the main drivers of financial services deals in the country over the past year.

Best comments were made at the Adam Smith Ukrainian Banking forum in Kiev.
He noted that consumer spending had increased by more than 30% over the past year, a trend that was expected to continue through 2007 and 2008. He said the banks listed above were all seeking to attract foreign strategic investors and that foreign representation in the Ukrainian banking sector would increase as a result.
"At the moment, as a percentage of total assets, foreign banks still play a relatively small role in Ukraine compared to other central and eastern European countries," he said. "But this will change as further consolidation takes place."

Best added that other drivers of consolidation in the sector would be foreign investors that had already acquired in the country looking to buy mid-tier banks for the potential synergies they presented. He noted, however, that deals would be relatively hard to come by because of the fragmented nature of the sector, and because the larger targets had already been acquired by foreign players, leaving only much smaller and niche operations.
"If you look at the 165 banks that are registered in the Ukraine today, the top 30 banks account for about 80% of banking assets and approx. 65% of total bank equity," he said. "The bottom 111 banks represent only 12% of total banking assets in the Ukraine. What we expect to see is some attrition in this group rather than acquisitions as some of these banks close down."

Last month Igor Solntsev, the deputy chairman of Forum, said the bank was not looking at selling a strategic stake, despite reports to the contrary.

A BrokBusinessBank executive told this news service that although he was not authorised to disclose any information on the issue, he did not deny that the rumour was in the right direction.

According to information from the Ukrainian Banks Association, they had a paid in capital of EUR 80m in 2005.
In August in a press release, OTP said it had held negotiations but decided not to sign a sale and purchase agreement for TAS-Kommerzbank. A spokesperson for TAS-Kommerzbank declined to comment.

In May this year, Best said that Rodovid Bank, the 28th largest bank in Ukraine, could buy Ukrinbank, the 47th largest, an earlier report from this news service said. Another earlier report estimated that a controlling stake could be bought in Ukrinbank for around USD 400m.

By Geoff Spiteri in Kiev and Elaine Green

ASC banking get-together in Kiev

Adam Smith Conferences held the Ukrainian Banking Forum at the Premier Palace Hotel in Kiev from November 7 through November 9. The purpose of the get-together was to discuss the main trends, challenges and opportunities of the Ukrainian banking sector today.

More than 350 major international and Ukrainian bankers, analysts and regulators from 27 countries gathered to hear from over 60 top-level speakers offering the firsthand information and practical case studies on the industry trends and challenges. According to Angela Prigozhina, head of corporate communications of the Raiffeisen Bank Aval, the share of foreign banks in Ukraine’s capital amounts to 29%. At the same time, several Ukrainian banks seek investors’ hand in marriage. “The International Finance Corporation could help a ‘bride’ with makeup in the marriage ceremony,” Thomas Lubeck, IFC senior investment officer, told The Ukrainian Times.

As far as the entry of Ukrainian banks into international capital markets is concerned, the launch of the IPO onto a foreign stock exchange is limited to 25% of their shares, said Igor Petrashko, head of transaction advisory services of Ernst & Young. In addition, the banks must have permission of the National Bank of Ukraine to sell 10% of shares to a non-resident bank.

Besides formal session of the forum, there was a varied program of social events, allowing every opportunity for attendees to network with their peers.

Readers of The Ukrainian Times know that Adam Smith Conferences have been organizing senior level and cutting edge business conferences for Ukraine and key European emerging markets for over 12 years.

ASC is affiliated to the Adam Smith Institute, the world-renowned economic think-tank that for over 25 years has been advising the UK government and governments around the world on issues of privatization and macroeconomic policies.