Raiffeisen Pads Pockets With Polish Cash to Chase Eastern Growth

(Bloomberg) -- Sometimes the best way forward is a step back.

That’s the philosophy behind Raiffeisen Bank International AG’ decision to offload its Polish banking business to BNP Paribas SA for almost $1 billion. The transaction not only ends the Austrian financial institution’s perennial tussles with Polish regulators, it pads its war-chest to expand elsewhere in eastern Europe.

“By gaining capital, we create additional scope for strengthening our market position in relevant markets,” Raiffeisen Chief Executive Officer Johann Strobl said in a statement. “This transaction represents a significant step towards optimizing our group.”

The decision announced Tuesday by Raiffeisen, one of the biggest eastern European lenders along with UniCredit SpA and Erste Group Bank AG, is a further sign of a larger reshuffle of banks in former-communist Europe, much of which is part of the European Union, a decade after the financial crisis rocked the continent.

Banking executives with ties to the region still see opportunities in Europe’s emerging-market corners as local economies and loan books grow faster than in the west, though they are being more circumspect in choosing new opportunities.

Growth Needs

“This isn’t too bad a deal for Raiffeisen, the question is what they do with the capital, and the answer can only be that they have to grow,” said Matthias Siller, who manages the 207 million-euro ($256 million) Baring Emerging Europe investment fund. “They have to play this consolidation game now, they won’t be able to meet their targets for return on equity without acquisitions.”

Raiffeisen sold the assets to BNP’s Warsaw-listed subsidiary BGZ BNP Paribas SA for 775 million euros, just shy of book value and adding 90 basis points of core capital available for expansion.

The sale comes three years after Raiffeisen decided to exit its Polish business to bolster a balance sheet battered by the crisis over Russia’s annexation of Crimea from Ukraine, which caused the group’s first-ever annual loss. It was overshadowed by fights with the Polish banking regulator, known as KNF, over pledges made when Raiffeisen bought the business. A planned sale to Alior Bank SA failed in 2016 and an initial public offering was pulled last year as potential investors shunned the deal.

Moving On

As banks across eastern Europe spring-clean their portfolios, leaving markets where they are sub-scale and can’t compete and reallocating resources, the BNP purchase cements its position as the sixth-largest Polish lender, closing in on No. 5, ING Bank Slaski SA.

“The deal shows determination from BNP Paribas to become a significant player in Poland,” said Kamil Stolarski, an analyst at Pekao IB. “I expect there will be more occasions for buying banks in Poland in the next years for BNP.”

Raiffeisen can now move to buy assets in countries including the Czech and Slovak republics, Romania, or Russia.

Strobl flagged in March that Raiffeisen would spend excess capital on acquisitions rather than shareholder payouts. The group’s biggest cash cow, Russia, once again demonstrated its potential to unsettle the group as Raiffeisen’s stock lost as much as 25 percent over three trading days after the U.S. tightened sanctions on the country. Raiffeisen rose as much as 5.5 percent in Vienna on Monday on the back of the Poland deal, before falling along with Russian lenders such as Sberbank.

New Openings

Opportunities in the region may arise as Societe Generale SA is seeking to sell unidentified “sub-scale” units while Italy’s Intesa Sanpaolo SpA is “refocusing” in four countries. On the buying side, OTP Bank Nyrt of Hungary and KBC Group NV are each willing to spend more than 1 billion euros on new regional assets.

The price BNP agreed to pay for the Polish business is equivalent to 0.95 times the book value, based on end-2017 data. That’s above BGZ’s own valuation of 0.8 times book value, and also more than what Deutsche Bank AG yielded when it sold its Polish business in December. The average price-to-book ratio of the WIG Bank index is 1.1, according to data compiled by Bloomberg.

“The discount reflected in the price to book value is small, taking into account the low profitability of Raiffeisen,” said Lukasz Janczak, an analyst at Ipopema Securities in Warsaw. “Only the delivery of synergies may defend such a deal in the view of BNP’s shareholders.”

Raiffeisen is keeping 3.5 billion euros of assets that are vulnerable to regulatory or legislative actions such as mortgages denominated in Swiss francs and loans to wind farms, it said in the statement.

The transaction is expected to close in the fourth quarter, subject to regulatory approvals. Raiffeisen will book a 120 million-euro loss on the deal. Its pledge to Poland’s KNF to list the business in Warsaw is “deemed to be fulfilled” with the deal, it said.

--With assistance from Konrad Krasuski Fabio Benedetti-Valentini and Ross Larsen

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net.

To contact the editors responsible for this story: Neil Callanan at ncallanan@bloomberg.net, Dale Crofts at dcrofts@bloomberg.net, James M. Gomez, Wojciech Moskwa

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