Erste CEO Sees Rate Crunch as Chance to Expand Further in East

(Bloomberg) -- The current period of fast rising prices and continued crisis support from central banks will create acquisition opportunities for Erste Group Bank AG, according to its chief executive officer.

The biggest lender in the central and eastern European region is on the lookout for deals with a war chest of almost 1 billion euros ($1.2 billion). It’s focusing on transactions that are fairly valued and would boost the group’s income, CEO Bernd Spalt said in an interview.

“This combination of ultra-low interest rate levels and relatively high inflation rates, which is a difficult combination for banks, is bringing a lot of pressure on the market,” Spalt said. “This pressure will even enhance acquisition opportunities.”

Some central banks in Erste’s main markets, including Hungary and the Czech Republic, have started to raise interest rates in response to rising prices. Yet the concern that tightening monetary policy too fast could hurt fragile economic recovery has still left borrowing cost below the level of inflation, leading to negative real interest rates.

Banks, Portfolios

A steady pipeline of bank deals has already emerged recently after the mergers and acquisitions market ground to a halt in the wake of the pandemic. 

Erste’s Hungarian brokerage unit may grow to the largest on the Budapest Stock Exchange after it agreed earlier this month to buy Random Capital. Cross-town competitor Raiffeisen Bank International AG has bought lenders in the Czech Republic and Serbia. Hungary-based OTP Bank Nyrt. is set to become Slovenia’s largest bank after buying Nova Kreditna Banka Maribor d.d. in May.

The most closely watched transaction in the region is Commerzbank AG’s planned sale of its Hungarian unit, for which Erste Group has expressed interest. But deals could go beyond banks.

“I think one needs to be flexible when it comes to what is an acquisition opportunity,” Spalt said. “There will possibly be portfolios up for sale, not necessarily only banks.”

Erste’s deals budget is capped by the difference between its 14.2% common equity tier-1 ratio at the end of June and its 13.5% target for the metric. The lender, active in 9 countries across the region, isn’t looking at targets that would require additional funding.

Another constraint is price, according to Spalt. Valuations have rebounded across the region, helped by central bank stimulus and rising equity markets. Should Erste fail to complete acquisitions, it may ultimately return excess capital to shareholders.

“Generally, I prefer to make acquisitions over paying excess dividends,” Spalt said. “We think that we can make use of the money better than just returning cash to shareholders.” 

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