Sharing deal insight European Financial Services M&A news ... · 04 Data analysis 08 Banking in Russia: Capitalising on resurgent growth in retail 12 Looking East: Market potential

Sharing deal insightEuropean Financial Services M&A news and views

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2 PwC Sharing deal insight

Contents

03 Welcome

04 Data analysis

08 Banking in Russia:Capitalising on resurgent growth in retail

12 Looking East:Market potential spurs renewed investor interest

16 Methodology

17 About PwCM&A advisory services in the financial services sector

18 Contacts

€22.4bnof European financial services deals in thefirst half of 2012, up 36% on the same periodin 2011

€2.8bnacquisition of Turkey’s Denizbank bySberbank is the Russian group’s largestacquisition outside its home market

As we anticipated in our last edition, dealvalues in the European financial servicesmarket recovered strongly in the secondquarter of 2012 and were almost doublethe equivalent period in 2011. Thenumber of transactions in our quarterlydataset also rose for the first time in twoyears and includes a number of cross-border strategic acquisitions.

Looking ahead, the need for restructuringand ambitions for growth within themarket will continue to vie with thedifficulties of finding buyers, agreeingprices and winning over investors. Thegrowing stream of domestic consolidation

and bolt-on deals within the mid andlower end of the banking market, whichhas helped to spur the increase involumes, looks set to continue. Furtherdrivers for a continued pickup in activityinclude the gathering pressure forconsolidation within many of Europe’sinsurance and asset management sectors(see Data analysis section).

The main focus of this edition is Easternand Central Europe. The first article looksat the prospects for investment in Russia’sfinancial services sector. The sector hasembarked on a period of renewedexpansion. But, the gap in growthpotential between the front runners andthe following pack is widening and thereturn on investment is therefore going tovary quite markedly as a result. Whilewe’re unlikely to see the major takeoversthat propelled a number of internationalgroups into leading market positions priorto the financial crisis, many institutionswithin Russia’s leading pack will beseeking international investment to helpthem sustain their current rate of growth.Private equity investors are likely to beamong those that will be looking tocapitalise (see ‘Financial services inRussia: Capitalising on resurgentgrowth’).

Russia’s leading financial institutionshave also set ambitious plans for regionalgrowth. As we examine in our secondarticle, strong margins and buoyantconsumer demand in the financialservices sectors of a number of Central,Eastern and South Eastern Europeanmarkets are attracting growing interestfrom investors. As some internationalgroups withdraw from the region, evermore opportunities are opening up fornew entrants and financial investors tomove in. Many of the businesses beingsold are profitable and well established.But economic prospects and marketdevelopment will continue to varymarkedly in the short-term (see ‘LookingEast: Market potential spurs renewedinvestor interest’).

We hope that you find this edition of‘Sharing deal insight’ interesting. Pleasedo not hesitate to contact either of us orany of the article authors if you have anycomments or questions or would like todiscuss the issues in more detail.

Welcometo the third edition ofSharing deal insight for 2012.

Sharing Deal Insight provides perspectives on the latest trends and future developments in the financial servicesM&A market including analysis of recent transactions and insights into emerging investment opportunities.

PwC Sharing deal insight 3

Nick PagePwC (UK)[email protected]

Fredrik JohanssonPwC (UK)[email protected]


The total disclosed value of Europeanfinancial services M&A captured in ourdataset grew to €12.7bn in the secondquarter of 2012, 31% higher than theprior quarter’s total of €9.7bn and almostdouble the comparable figure of €6.7bnfrom the second quarter of 2011.1

Halfway through this publication’s tenthyear, that improvement gives somegrounds to hope that 2012 may see amodest recovery from the low point of2011, when European financial servicesM&A was severely curtailed by theeurozone crisis. The total value of dealsfor the first half of 2012 was €22.4bn,a 36% improvement on the equivalentfigure of €16.5bn from 2011.

Less positively, the deal data provides areminder of the challenges facingEuropean financial services, particularlythe banking sector. The second quarter’stotal disclosed deal value of €12.7bnincludes one major banking rescue, a€4.5bn transaction which saw theSpanish government acquire a 45% stakein Bankia through the conversion ofpreference shares issued by Bankia’sparent group BFA (see Figure 1). Bankingbail outs may now be less frequent thanthey were, but they remain an occasionalfeature of European M&A.

Set against that, the quarter also saw theannouncement of two large strategicdeals valued at more than €1bn. Bothinvolve cross-border bids with a focuson expansion.

• Denizbank: The €2.8bn acquisition ofTurkish bank Denizbank by Sberbankof Russia was announced in June. Thedeal is Sberbank’s latest and largestmove outside its home market,following its €585m acquisition ofVolksbank International, an Austrianbank focused on Central and EasternEurope. In previous editions of thispaper we have discussed the appeal ofTurkey’s fast growing banking market.The sale of Denizbank by Dexia,currently being restructured by theFrench and Belgian governments, offersa rare chance for an outright purchaseof a large Turkish commercial bank.

• The London Metal Exchange: Junealso saw the announcement that themember-owned London MetalExchange is to be sold to Hong KongExchanges & Clearing for €1.7bn. Untilnow, the LME has remained one of thefew globally significant exchanges stillowned by its members. For HKEx, thedeal offers a chance to join a handfulof international groups competingglobally for exchange business.

These two large transactions were not theonly encouraging features of the secondquarter’s data. The total number ofEuropean financial services dealscaptured by our dataset increased for thefirst time in two years (see Figure 2).As suggested in our previous paper, webelieve this could be a more significantindicator of a recovery in financialservices M&A than total deal value.

Data analysis

As predicted in our last publication, a recovery in banking M&A saw the overall value and volume of Europeanfinancial services deals improve during the second quarter of 2012. Although one major banking rescue played asignificant role, the quarter also saw some more encouraging signs of a recovery in deal activity.

1 Deal data is sourced from mergermarket, Reutersand Dealogic, unless otherwise specified. Fordetails of our analysis methodology, please refer tothe information on page 16


The UK was the most active market,generating 48 deals compared with 33 inthe first quarter of 2012. These rangedfrom two of the quarter’s four largestdeals to a number without disclosedvalues, many involving targets inbrokerage and investment management.The UK was followed by Russia with 21transactions (compared with 16 in thefirst quarter) of which 12 were bankingrelated, Spain with 13 transactions (12 inthe first quarter) and Italy with 12 (3 in

the first quarter). There was alsoa pickup in the number of mid-markettransactions. Nine deals valued atbetween €200m and €1bn wereannounced, compared with five duringthe first quarter of 2012.

Analysis of the deal data by sector showsthat the driver of the overall growth indeal values was a recovery in bankingtransactions from the exceptionally lowlevel of the last quarter (see Figure 3overleaf). The Bankia rescue was a factor,

but so too were several other significanttransactions. Sberbank’s acquisition ofDenizbank was the largest, but anothernotable deal was Rabobank’s €301m bidfor the remaining 40% of its Polishsubsidiary Bank GospodarkiZywnosciowej. And a second Turkishbank, Eurobank Tekfen, was acquired byBurgan Bank of Kuwait for €271m fromGreek bank EFG Eurobank Ergasias.All three deals are intended to give thebidders greater exposure to fastergrowing banking markets than their own.

The insurance sector also generatedsome significant transactions during thequarter. In Spain, Grupo CatalanaOccidente and its partner INOC acquiredSpanish insurer Groupama Seguros yReaseguros from French group Groupamafor €405m. The deal is intended toconsolidate Catalana’s position in theSpanish market. In Germany, healthinsurer Continentale acquired generalinsurer Mannheimer for €225m, while inPortugal, Banco Espirito Santo paid€225m to acquire the 50% of insurer BESVida it did not already own.

An exception to these domestic dealswas the acquisition of Brit’s UK generalinsurance business by a US subsidiary ofCanadian insurer Fairfax for €239m.

Figure 1: European FS M&A by value (€bn), Q1 2010 – Q2 2012

Source: PwC analysis of mergermarket, Reuters and Dealogic data

25

15

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0Q1 10€8.6bn

Q2 10€11.1bn

Q3 10€21.2bn

Q4 10€9.5bn

Q1 11€9.8bn

Q2 11€6.7bn

Q3 11€5.0bn

Q4 11€16.3bn

Q1 12€9.7bn

Q2 12€12.7bn

1. €3.3bn AXA SA(UK life and pensionsbusinesses) –Resolution Limited

2. €1.4bn KBL EuropeanPrivate Bankers SA –The Hinduja Group

1. €3.8bn Allied Irish Banksplc (91%) – Ireland

2. €1.1bn Bluebay AssetManagement Plc –Royal Bank of Canada

1. €2.6bn Bank of Moscow OAO (46%) –VTB Bank OAO

2. €1.8bn Caja de Ahorros y Pensionesde Barcelona La Caixa(Banking operations) – CriteriaCaixaCorp SA

3. €1.1bn Vidacaixa-Adeslas SegurosGenerales (50% Stake) – MutuaMadrilena Automovilista SL

1. €1.1bn RACPlc – TheCarlyle Group,LLC

1. €5.8bn RBSAviation

2. €1.0bn BancaCivica

1. €1.3bn Bank of Moscow (34%) – VTB Bank OAO2. €1.1bn Bank of Ireland (37%) – Group of investors led by Fairfax Financial Holdings

1. €4bn Dexia Bank Belgium2. €2.5bn Skandia Insurance3. €1.8bn Bank Sarasin4. €1.3bn Banco Pastor

1. €4.5bn Bankia2. €2.8bn Denizbank3. €1.7bn LME

1. €3.9bn Deutsche Postbank AG (70%) –Deutsche Bank

2. €3.1bn Bank Zachodni WBK SA – BancoSantander

3. €2.3bn RBS WorldPay – Investor Group4. €2.0bn RBS Group (318 branches) –

Banco Santander

1. €1.3bn BNP Paribas LuxembourgSA (47%) – BGL BNPP

2. €1.2bn RBS Sempra CommoditiesLLP (European & Asiaoperations) – JP Morgan Chase

Figure 2: European FS M&A by disclosed value (€bn) and number of deals,Q1 2010–Q2 2012

n Deal value Deal volume


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Brit, undergoing restructuring after its2010 buyout by two private equity firms,also sold its UK regional underwritingbusiness to Australian insurer QBE(€ undisclosed).

Banking and insurance transactions makeup all but two of the quarter’s Top 10announced deals (see Figure 4). Theremaining Top 10 deals were HKEx’s bidfor the LME and Royal Bank of Canada’sbuyout of its securities servicing jointventure RBC Dexia Investor Services fromDexia for €838m.

In contrast, asset management hadanother very quiet quarter for M&A, withno deals making it into the Top 10. Thelargest announced asset managementdeal was Man Group’s acquisition of fundof hedge funds manager FRM for €111m,although this could rise to €169m,depending on performance. The nextlargest asset management deal sawSumitomo Mitsui acquire Daiwa’s fundmanagement activities in the UK andIreland for €30m.

As well as identifying the quarter’s highlevel developments and largest deals,our analysis reveals some other themesshaping European financial servicesM&A. We highlight five in particular:

• In-market consolidation amongWestern European banks: The Italianbanking market saw the announcementof several domestic deals during thequarter. The largest was Banca Montedei Paschi di Siena’s sale of its 60%stake in Biverbanca CR Biella e Vercelli

to Banca CR Asti for €203m. Otherdeals included several consumerfinance and depositary banking targets.In the Netherlands, regional lenderFriesland Bank agreed to merge withthe co-operative giant Rabobank. Andin Spain, Liberbank, Ibercaja and Caja3announced plans to merge, creatingSpain’s seventh largest bank by assets.The desire to strengthen capital andliquidity ratios was one of the mostconsistent motivations for domesticbanking transactions.

• Payment industry transactions: Severaldeals involving transaction processingtargets were announced during thequarter. These included the €140macquisition of PaysafeCard.com ofAustria by UK payment platform Skrill;the purchase of UK firm CorporatePayby Wright Express of the US for €28m;and First Data Corp’s 30% investmentin OmniPay of Ireland for anundisclosed sum.

• Scale building among UKintermediaries: Financialintermediaries in the UK continue toconsolidate in response to difficulttrading conditions. Several UKinsurance brokers were acquired duringthe quarter, with Towergate aloneacquiring four smaller rivals. A numberof securities’ brokers were alsoacquired. Two examples were USbroker FXCM’s purchase of a 50% stakein UK forex broker Lucid Markets(€140m) and Markit’s acquisition ofData Explorers (€ undisclosed).

• Loan disposals by banks: Although notincluded in our dataset,2 we note theannouncement of several loan portfoliosales during the second quarter.European banks continue to use assetdisposals to slim down their balancesheets and boost regulatory capitalratios. Banks announcing loan disposalsduring the quarter included Bank ofIreland, Barclays, ING, PKO of Poland,Royal Bank of Scotland and Santander.Buyers ranged from private equityfunds and insurers to debt collectionspecialists.3

• A continuing flow of small privateequity deals: The second quarter wascomparatively quiet in terms of privateequity-led M&A, but firms continuedto support management buyouts inmarkets including the UK and Greece.The quarter also saw two private equitymergers between ACG Private Equityand Bex Capital of France, and betweenStiftelsen Industriefonden andMalmohus Invest of Sweden.

Looking aheadFinancial services M&A in Europe is beingshaped by competing forces. The need forrestructuring and the desire for growthare being tempered by the difficulty offinding buyers, agreeing prices andwinning over investors. Even so, as thedata makes clear, several areas continueto generate M&A transactions.

Banking restructuring will remain theprimary driver of European financialservices M&A. At the larger end of thespectrum, Western European banks mayfind it increasingly difficult to identifybidders for large non-core bankingdisposals – as illustrated by LloydsBanking Group’s protracted sale of 630UK branches.4 Most Western Europeanmarkets and segments are not attractiveto buyers from outside Europe, and manydomestic players lack the capital orinvestor goodwill to make majoracquisitions.

Even so, small and medium-sizeddomestic consolidation is likely tocontinue in Western Europe’s morefragmented markets, especially in Spain,Italy and Greece. In the case of Greece,Societe Generale and Credit Agricole areboth reported to be readying their Greekbanking units for sale.5 Businesses comingup for sale in the better performing

Figure 3: European FS M&A by value (€bn), analysed by subsector,Q1 2010–Q2 2012

n Asset Management n Banking n Insurance n Other


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0Q1 10€8.6bn

Q2 10€11.1bn

Q3 10€21.2bn

Q4 10€9.5bn

Q1 11€9.8bn

Q2 11€6.7bn

Q3 11€5.0bn

Q4 11€16.5bn

Q1 12€9.7bn

Q2 12€12.7bn


markets of Central & Eastern and SouthEastern Europe will also continue toattract bidders from inside and outsideEurope. At the smaller end of the scale,private equity firms will remain interestedin picking up distressed targets,businesses with low capital requirementsand asset portfolios.

Restructuring is also likely to generatesome significant asset management andinsurance deals. One notable transactionannounced after the end of the secondquarter was Julius Baer’s acquisition ofMerrill Lynch’s non-US wealthmanagement business from Bank ofAmerica, for a reported figure of $1.6bn.6

The long-planned sale of Dexia AssetManagement is ongoing,7 and Rabobankis to be considering the sale of fundmanagement arm Robeco, although wenote the difficulties that some Europeanbanks have had in disposing assetmanagement units.

In the Italian insurance market, themooted four-way merger betweenUnipol, Fiondiaria, Premafin and MilanoAssicurazione – if achieved – would createa stronger rival for market leaderGenerali.

Barring any significant financial marketshocks, we expect the number and valueof deals to improve during the second halfof 2012, building on the second quarter’sgrowth. However, if the last two yearshave taught us anything, it is that dealconfidence is easily damaged byeconomic, political and regulatorysurprises. These are the factors that willdetermine how M&A develops during thesecond half of 2012 and beyond.

Figure 4: Top 10 European FS deals by value, Q2 2012

Month Target company Target country Bidder company Bidder country Deal value (€m)

Apr Bankia (45%) Spain FROB Spain 4,456

Jun Denizbank Turkey Sberbank Russia 2,816

Jun London Metal Exchange UK Hong Kong Exchanges Hong Kong 1,719& Clearing

Apr RBC Dexia Investor Services UK Royal Bank of Canada Canada 838(50%)

Jun Groupama Seguros y Reasuguros Spain Grupo Catalana Occidente, Spain 405INOC

Apr Bank Gospodarki Zywnosciowej Poland Rabobank Netherlands 301(40%)

May Rossiyskiy Kredit Bank Russia Group of Russian Russia 272private investors

Apr Eurobank Tekfen Turkey Burgan Bank Kuwait 271

Jun Brit Insurance UK RiverStone Group US 239

Apr BES Vida Companhia de Seguros Portugal Banco Espirito Santo Portugal 225(50%)

Apr Mannheimer Holding (92%) Germany Continentale Germany 225Krankenversicherung

Subtotal 11,767

Other 945

Grand total 12,712


2 Refer to methodology on page 16

3 For more on-loan portfolio sales, refer to ‘EuropeanInvestor Insights 2012’, PwC’s European PortfolioAdvisory Group, May 2012

4 ‘Lloyds in £750m deal for Lloyds branches’,Financial Times, 19.07.12

5 ‘SocGen in talks to sell Greek Subsidiary’,Financial Times, 29.08.12

6 ‘Baer seeks scale through Merrill Lynch’, FinancialTimes, 13.08.12

7 ‘Dexia asset management sale nears’, FinancialTimes, 27.06.12


Russia’s economy has bounced backstrongly from the financial crisis, thanksto favourable oil prices and lowgovernment debt. The 4% GDP growthseen in 2011 is expected to continue overthe next five years.1

The economic rebound is fuelling furtherincreases in disposable wealth, withprivate consumption per capita set togrow by 4–5% in the medium-term.2

With disposable incomes increasing andunemployment declining, consumerconfidence is almost at pre-crisis levels.A strong increase in consumption and theexpansion of the middle class are drivinggrowth in the consumer market.

In the banking sector, the widermacroeconomic upturn is reflected in thesharp climb in demand, following the dipin 2009 and 2010 (see Figure 5). Thefastest growing segment is retail (seeFigure 6), with cash, card and auto

lending seeing significant growth (non-mortgage retail lending increased byCAGR 16% from 2006 to 2011).3 Thevalue of credit card transactions is alsoincreasing strongly (by around 60% in2011 to reach €9bn4). The retail depositsbase has also been significantlyexpanding, increasing by 90% fromJanuary 2009 to April 2012. While retailspreads have narrowed over the past twoyears as interest rates have fallen, theaverage retail net interest spread is stillmore than 10% for non-auto loans.

Yet, this is still an underpenetratedbanking market with only 70% of theadult population being banked5 and cashstill used in the overwhelming majority oftransactions.6 In addition, the loan to GDPratio is around 40%, compared to morethan 130% in the eurozone7 and thenumber of credit cards per person inRussia is 0.1, compared to 0.3 in Poland,0.6 in Italy and 1.1 in the UK.

Banking in Russia: Capitalising on resurgent growthin retail

The Russian banking sector has embarked on a period of renewed expansion. But this is also a market where thegap in growth potential between the high growth banks and the following pack is widening and the return oninvestment is therefore going to vary quite markedly as a result. The most attractive opportunities are businesseswith a clear strategic vision and the execution capabilities to deliver, many of whom will welcome private equityand other financial investors. So what are the future prospects for the banking market and how can investorsmake the most of the openings?

1 IMF World Economic Outlook April 2012

2 EIU, IMF, Euromonitor 2012

3 Euromonitor 2012

4 Bank of Russia statistics, 31.12.11

5 Euromonitor statistical data 2011

6 PwC analysis of Bank of Russia money supplystatistics, 01.08.12

7 CEE Banking Sector Report, Raiffeisen Bank,October 2011

Andrew Cann PwC (Russia)[email protected]

AleksanderKolmykov PwC (Russia)[email protected]


8 Economist, 19.03.12

Figure 5: Deposit and credit growth

Total value of deposits Total value of loans

Source: Bank of Russia

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Figure 6: Retail deposit and credit growth

Retail deposits Retail loans

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Looking ahead, retail banking in Russia isset to grow and develop further. This willbe driven by increasing penetration ofretail banking, disposable income growth,along with growth in the proportion ofnon-cash transactions (partially due toaccelerating demand for online sales –Russia has Europe’s largest internetenabled population8).

In addition, although take-up of bankingand other financial services is muchhigher in the largest urban centres thanother parts of the country, Russia’ssmaller cities are now the main focus ofgrowth and are set to be the keycompetitive battle grounds over thecoming years.

Looking ahead,retail banking inRussia is set togrow and developfurther. This willbe driven byincreasingpenetration ofretail banking,disposable incomegrowth, along withgrowth in theproportion of non-cash transactions


High-growth playerspull awayDespite the strong growth overall,performance and potential varies quitemarkedly across the market. There areover 1,000 banks in Russia and there arevast differences in the quality of strategiesand execution skills. High-growth playersare gaining market share on the back ofsharp strategic focus, good distributionand investment in technology/innovation. But many will need furthercapital to sustain the pace of growth overthe next few years, opening upopportunities for international investors.The size and value of the stakes couldprove especially attractive to privateequity. Recent examples include the€40m investment in Tinkoff CreditSystems (TCS) by Baring Vostok, aRussia-focused private equity firm.9

In a market that has traditionally beendominated by large established playerswith extensive branch networks, TCShas pioneered a fully direct and onlinedistribution model. TCS is now rankedfifth in the credit-card market by volume,having doubled its market share over thepast two years.10

For now, it is unlikely that we will seemore of the takeovers that allowedinternational banks including Italy’sUniCredit (International Moscow Bank in200711) and Austria’s Raiffeisenbank(Impexbank in 200612) to establishthemselves in Russia’s Top 10 prior to thefinancial crisis. The upper end of themarket is becoming increasinglyconcentrated as a result of consolidationand few if any international groupscurrently appear to have the appetite totake over one of the bigger playersoutright. Indeed, takeover ambitions aremoving the other way, with major Russianbanks acquiring a number of leadinginstitutions in Central and South EastEurope over the past year (see ‘LookingEast: Market potential spurs renewedinvestor interest’). Therefore, the mostattractive opportunities within the marketexist with smaller, high-growth,innovative players.

09 Reuters, 14.05.12

10 Bank of Russia statistics, 31.12.11

11 UniCredit media release, 28.12.06

12 Raiffeisen Bank International media release

Figure 7: Most valuable recent deals in Russian banking

Date Target name Target nation Acquiror Acquiror nation Deal value (€m) Announced

Feb 11 Bank of Moscow OAO (46.48%) Russia VTB Bank OAO Russia 2,557

Sep 11 Bank of Moscow OAO (34.09%) Russia VTB Bank OAO Russia 1,275

Mar 11 Troika Dialog ZAO Russia Savings Bank of the Russia 722 Russian Federation OAO- Sberbank

Apr 11 TransCreditBank OJSC Russia VTB Bank OAO Russia 676 (56.8% Stake)

Jun 11 Russian Trading System OAO Russia Moscow Interbank Russia 453 (53.7% Stake) Currency Exchange ZAO

May 12 Rossiyskiy Kredit Bank OAO Russia Group of private investors Russia 272

Jan 11 OOO Rossiysky Promyishlenny Russia Marfin Popular Bank Cyprus 52 Bank (49.96% Stake) Public Company Ltd

Mar 11 Stolichnoye Kreditnoye Russia Alor Group; Russia 33 Tovarishchestvo Bank NPF Promagrofond(99.1% Stake)

Feb 12 TKB Capital ZAO Russia NNK Tradition OOO Russia 25



Editorial eyeThe strong growth in the Russian retail banking market is attracting considerableinvestor interest. Prices are quite favourable overall and certainly nowhere nearthe peaks seen prior to the crisis, especially with more prospective sellers thaninvestors in many parts of the market. But the prices of stakes in the mostattractive targets are increasing and investors may need to move quickly tosecure a good deal.


While Western Europe remainschallenged economically, some countriesin Eastern Europe are growing at arelatively strong pace. The front runnersinclude Poland, one of the countries thatforms the main focus of this article (wealso look at Hungary, the Czech Republicand some of the markets in South EasternEurope). Poland is expected to grow by2.9% in 2012 and 3.2% in 2013.1 Thedownturn in their export markets inWestern Europe has been largely offset bygrowing domestic demand.

However, the picture within this highlydiverse region remains mixed. Hungary’seconomy is expected to contract andgrowth in the Czech Republic to remainflat in 2012, though GDP is set to expandonce again in 2013.2

PolandPoland is the region’s largest financialservices market.

The strong performance of the economyhelped to stimulate record banking sectorprofits in 2011. The value of householdloans grew by 12% in 2011 and corporateloans increased by 20% on the back ofsignificant infrastructure construction.3

The sale of non-core assets by WesternEuropean groups is creating opportunitiesfor acquisition. A lot of these non-core

assets lie in relatively fragmentedsegments such as asset management,which is creating a further spur fordivestment and consolidation. Theopenings were highlighted by theacquisition of Kredyt Bank by BancoSantander from Belgium’s KBC Group inFebruary 2012. “With this transaction,Banco Santander will significantlystrengthen its presence in Poland, one ofthe most dynamic economies in Europe,obtaining the critical mass we seek in ourcore markets,” said Emilio Botin,Chairman of Banco Santander.4 Followingthe acquisition of a controlling stake inBank Zachodni WBK in 2011,5 thetakeover of Kredyt Bank has enabledBanco Santander to consolidate itsposition as the third largest bank in whatit describes as one of its ‘ten core markets’,with a market share of around 10%.In turn, KBC will benefit from a capitalrelease of some €700m. More recently,a number of bids have reportedly beensubmitted by international groups forAlior Bank.6

As part of its planned exit strategy inPoland, KBC Group reached anagreement with Talanx International tosell its subsidiary, Warta, the secondlargest insurer in Poland, in January2012.7 In June, Talanx International AGand Japanese insurer Meiji Yasuda LifeInsurance Company acquired the Europa

Looking East: Market potential spurs renewedinvestor interest

Bojidar Neytchev PwC (Bulgaria)[email protected]

Ervin Apáthy PwC (Hungary)[email protected]

Piotr Romanowski PwC (Poland) [email protected]

A year marked by continuing growth, strong margins and buoyant consumer demand in the financial servicessectors of some of the Central, Eastern and South Eastern European markets are attracting gathering interestfrom investors. As some international groups withdraw from the region to help them meet capital demands andconcentrate on core markets, ever more opportunities are opening up for new entrants and financial investorsto move in.

1 World Bank E11 Economic Report, 27.06.12

2 World Bank E11 Economic Report, 27.06.12

3 Ministry of Treasury Economic News, 19.03.12

4 Banco Santander and Kreydt Bank media release,28.02.12

5 Banco Santander media release, 29.03.11

6 Mergermarket update, 07.09.12

7 Warta media release, 02.07.12


Group.8 More recently, Generali PPF,a joint entity of Generali, the Italianinsurance group and PPF Group, aPrague-based investment and financegroup signed an agreement to acquireFrance’s Groupama’s Polish branch.9

Banking market valuations in Poland (inour analysis, typically 1.0–1.5 times bookvalue) are higher than many other partsof Europe, but remain attractive, giventhe potential for growth. But valuationissues are making it difficult to closedeals, with potential buyers typicallybidding 20–30% below market price.The need for extensive due diligence inan uncertain market is lengthening thedeal process. As a result of the difficultiesin agreeing on prices and finalisingtransactions, we may see a shift fromauctions to one-to-one deals. Otherfactors to consider include thedetermination of Poland’s bankingregulator to take a very proactive positionin the sales process.

We see limited appetite for outboundinvestment within the Polish FS sector.There have been primarily three strategicplayers considering expansion in newmarkets and geographies. The leadingbanking group, PKO BP, is one of thenames believed to be focusing on growthvia acquisitions as it seeks to establishitself as a significant regional player.However, the Group has not announcedany specific targets. The largest Polishinsurance group, PZU SA, has indicatedpotential interest in outboundacquisitions. The Group has recentlyformed a special purpose vehicle (PZUInternational) to act as the insurer'sacquisitive arm, focusing on small andmedium targets in insurance and othersectors. Getin Holding SA, an investmentgroup focusing on companies operating inthe FS sector, completes the list of Polishcompanies that have declared an interestin international expansion.

Figure 8: Recent deals in CEE and SEE financial services

Date Target name Target nation Acquiror Acquiror nation Deal value (€m) SubsectorAnnounced

Feb 12 Kredyt Bank SA Poland Banco Santander SA Poland 790 Banking

Jan 12 Towarzystwo Ubezpieczen i Poland Talanx International AG; Germany 770 InsuranceReasekuracji WARTA SA Meiji Yasuda Life Insurance

Company

Dec 11 TU Europa SA (84%) Poland Talanx AG; Germany 336 InsuranceMeiji Yasuda Life Insurance CoJapan

Apr 12 Bank Gospodarki Zywnosciowej Poland Rabobank Netherlands 301 Banking(40%)

Dec 11 ING ABL Polska SA Poland ING Bank Slaski SA (ING BSK) Poland 48 Banking

Nov 11 Dom Maklerski TMS Poland Nabbe Investments Luxembourg 43 Principal Brokers S.A. (95% Stake) finance

Nov 11 Polish Power Exchange SA Poland Warsaw Stock Exchange SA Poland 40 Broking(80.33%)

Apr 12 MKB Romexterra (92.4% Stake) Romania PineBridge Investments LLC USA 20 Investment banking

Nov 11 Polisa Zycie S.A. (75% Stake) Poland The Vienna Insurance Austria 15 InsuranceGroup AG

Jun 12 PM&A Investicijsko Podjetje doo Slovenia Zavarovalnica Triglav dd Slovenia 15 Insurance

Aug 12 Powszechne Towarzystwo Poland PKO Bank Polski SA Poland 15 Pension, Emerytalne Polsat SA (OFE Polsat) health and

welfare funds

May 12 Magyar Takarekszovetkezeti Hungary Hungarian Development Hungary 14 Banking Bank Rt - Takarekbank (38%) Bank Rt - MFB


8 Talanx media release, 04.6.12

9 Groupama media release, 24.07.12


Czech RepublicThe Czech economy continues to beaffected by the downturn in its mainexport markets in Western Europe and itmay be some time before consumersentiment and demand begin to improve.

Nonetheless, financial services in theCzech Republic have been relativelyresilient, with balance sheets andprofitability continuing to be strong.Despite some debt write-offs based oninsolvencies, business banking has faredquite well and certainly better than retailbanking. The mortgage market hasrecovered from a significant dip in recentyears on the back of record low ratesand demand is now climbing back topre-crisis levels.

Many of the largest banks are owned byforeign groups (foreign ownership ofbanking assets is 95% compared to themore regionally typical 60–65% in Polandand Hungary10) and these holdings makeup a significant portion of the group’sprofits. One of the key factors that havemade the Czech banking sector differentfrom others in the region is the highamount of profit coming from servicefees. Until relatively recently, banks haddone little to adjust their fee structures,though this is now changing as newentrants come into the market andintroduce flat rate and free usage models.This move is encouraging manycustomers to switch accounts and puttingfurther pressure on the alreadycompetitive market. However, the newentrants still have low market shares andmost are still loss-making.

The top end of the Czech banking marketis relatively stable and major acquisitionand divestment is unlikely. However, themid and lower end of the market is seeingconsiderable interest and activity, with

some Western European groups exitingand others moving in to acquire theirholdings – recent examples includeRussia’s Sberbank’s acquisition of theCzech assets of Austria’s Volksbank (partof a wider deal involving a number ofVolksbank’s foreign assets).11 In 2012, theUK’s Aviva Insurance sold its Czech,Hungarian and Romanian businesses toMetLife.12 The openings for private equitybuyers were highlighted by AnaCapFinancial Partners’ acquisition of a stakein Banco Popolare Ceska Republika.13

The top end of the insurance market ishighly consolidated. The maincompetitive battleground is motorinsurance. The resulting price war, someof which has been fuelled by new foreignentrants seeking to quickly win marketshare, is putting unsustainable pressureon margins and the sector is now lookingfor a way to stabilise premiums. Some ofthese entrants may seek to divest if theycannot secure the anticipated share.

HungaryHungary was one of the first markets inthe region to liberalise and open up toforeign investment and there does nowappear to be a reaction against this. Largesections of the private pensions markethave been nationalised. The FS sector notonly has to contend with a weak economy,

but is also being expected to co-financesovereign debt. High levels of governmentdebt have led to the introduction of toughnew banking and insurance taxes since2010. Heavy foreign denominatedhousehold debt has spurred thegovernment to introduce a series ofsavings programmes at the expense oflenders. Budget deficits are also puttingpressure on banking sector stability andfurther support by parent groups maybe needed.

In line with some Western Europeanbanks’ efforts to sell non-core assets,further divestment is likely, opening theway for newcomers. Sberbank’s deal withVolksbank included the acquisition of itsHungarian assets, for example.14

Established players are also looking totake advantage of upcomingopportunities. Examples include ErsteBank Hungary’s acquisition of the privatebanking business of BNP ParibasHungary.15

The openings for private equity buyerswere highlighted by Pinebridge Capital’sacquisition of MKB Romexterra,16 adivision of the Hungarian MKB Bank,which is in turn majority owned byGerman bank BayernLB. The Hungariangovernment’s plans to take a strongerstake in the FS sector are reflected in the

10 Ministry of Treasury Economic News, 19.03.12

11 Volksbank media release 15.02.12

12 Aviva Group media release, 30.01.12

13 Wall Street Journal, 20.06.11

14 Volksbank media release 15.02.12

15 Erste Bank media release, 09.08.12

16 Reuters, 05.04.12


recent announcement of governmentowned MFB Hungarian DevelopmentBank’s acquisition of a controlling interestin Takarékbank, including the 40%owned by Germany’s DZ Bank.17 Inparallel, OTP Bank, the leading player inHungary continues to seek ways toexpand in the region, with Romania andSerbia being a particular focus.18

Similarly to banking, the Hungarianinsurance sector is still facing significantchallenges. In the life segment, thenumber of unit-linked life insurancecontracts has dramatically decreased in2012 because of households’ increasedcalls on their savings and investments.In the non-life insurance sector, thebiggest battleground is motor coverincluding the compulsory third-party

liability, where competition is strong andgross written premiums dropped by morethan 20% last year.19 The biggest deal wasthe sale of Aviva’s Czech, Hungarian andRomanian life insurance businesses toMetLife as mentioned earlier. We do notexpect significant transactions in the nearfuture in this highly concentrated market.

South-East Europe (SEE)The SEE region brings together countrieswith significant economic and politicaldifferences.20

Foreign-owned banks remain dominantin SEE with a market share of more than80%.21 But there has been some declinerecently. There are a number of reasonsfor this. They include the expansion ofmore opportunistic locally ownedbanks in Bulgaria and Romania andthe exit of Allied Irish Bank fromBulgaria in 2011.

Some European banks’ efforts to scaleback their SEE holdings are expected tobe the primary force shaping the M&Alandscape over the next few years.Examples include Hypo Alpe Adria(HAA), the nationalised Austrian bank,which is looking to speed up the sale of itssubsidiaries in Bulgaria, Bosnia, Croatia,Hungary, Macedonia, Montenegro andSerbia.22 Further opportunities are likelyto come from a planned new wave ofprivatisation in Croatia and Slovenia.However, concerns over falling bankprofits and an increase in non-performingloans may be holding back acquisitionactivity in Romania and Bulgaria atpresent. Notably, Volksbank Romania

was not part of the CEE-asset packageacquired by Sberbank.

While Greek banks own significantholdings in the region, any firm plans fordivestment are unlikely until there is aclear decision about the Greekgovernment’s plans for ‘bridge’ capitaland/or ‘permanent recapitalisation’.

Looking ahead, the average market shareof the top five banks in SEE countries islower than most Western Europeancountries. While activity may be temperedby short-term factors, furtherconsolidation is therefore likely in themedium to longer term.

Editorial eyeDivestment by international groups is creating openings for others looking todevelop their presence in a CEE and SEE region offering significant potential forgrowth overall. Many of the businesses being sold are profitable and wellestablished, creating significant openings for private equity investment. Buteconomic prospects and market development will continue to vary markedly inthe short term. Exposure to debt issues also varies and will be a key factor inacquisition evaluation and due diligence.

17 Bloomberg, 18.06.12

18 Origo, 07.07.12

19 Hungarian Financial Supervisory Authority’sreports on the insurance sector, 23.08.12 and31.07.12

20 For the purposes of this article, the SEE regionincludes the EU member states of Slovenia,Romania and Bulgaria, the upcoming EU memberstate of Croatia (EU entry scheduled on 1 January2013), as well as five further countries from theWestern Balkans, namely Serbia, Bosnia andHerzegovina, FRY Macedonia, Albania andKosovo. Greece has been excluded as thesituation is exceptional. Turkey has beenexcluded as it was the focus of an article in arecent edition of Sharing Deal Insight.

21 Raiffeisen Research 2011 (proportion does notinclude Slovenia, Macedonia and Kossovo)

22 HAA media release, 30.12.11

Figure 9: European FS deals – quarterly summary

Deal value€ in billions Q110 Q210 Q310 Q410 FY10 Q111 Q211 Q311 Q411 FY11 Q112 Q212

Asset management 1.7 1.0 2.4 1.5 6.6 1.0 0.4 0.4 0.4 2.1 0.3 0.2

Banking 4.4 5.8 14.8 5.5 30.4 5.9 2.0 3.7 11.0 22.7 1.9 8.5

Insurance 2.0 4.1 1.8 1.6 9.5 2.0 2.5 0.2 4.0 8.6 0.9 1.1

Other 0.5 0.3 2.3 0.9 3.8 0.9 1.8 0.7 1.0 4.3 6.6 2.9

Total deal value 8.6 11.1 21.2 9.5 50.3 9.8 6.7 5.0 16.3 37.7 9.7 12.7

Corporate 7.5 10.8 17.0 4.5 39.8 9.5 4.8 3.3 10.2 27.8 9.3 7.9

PE 0.8 0.0 4.2 1.1 6.1 0.3 1.9 0.5 0.7 3.4 0.2 -

Government 0.3 0.2 0.0 3.9 4.3 0.0 - - 4.4 4.4 - 4.5

Other - - - - - 0.0 0.0 1.2 1.0 2.2 0.2 0.3

Total deal value 8.6 11.1 21.2 9.5 50.3 9.8 6.7 5.0 16.3 37.7 9.7 12.7

Domestic 3.9 7.5 10.2 7.1 28.7 8.5 3.0 2.6 11.1 25.2 2.8 6.1

Cross-border 4.6 3.6 11.0 2.4 21.6 1.3 3.6 2.4 5.2 12.5 6.8 6.7

Total deal value 8.6 11.1 21.2 9.5 50.3 9.8 6.7 5.0 16.3 37.7 9.7 12.7

Source: mergermarket, Thomson Reuters, Dealogic, PwC analysis Note: May contain rounding differences


Methodology

The Data analysis section in this issueincludes financial services deals:

• reported by mergermarket, Reuters andDealogic (see Figure 9);

• announced in Q1 2012, and expected tocomplete;

• involving the acquisition of a >30%stake (or significant stake givingeffective control to the acquirer); and

• acquisitions of Europe-based FS targetswhere a deal value has been publiclydisclosed.

Our analysis excludes deals that, inour view, are not ‘pure’ FS deals involvingcorporate entities, or entire operations,e.g. real estate deals and sales/purchasesof asset portfolios where the discloseddeal value represents the value ofassets sold.

The main areas of our services are:

• lead advisory corporate finance;

• deal structuring, drawing onaccounting, regulation and taxrequirements;

• due diligence: commercial, financialand operational;

• business and asset valuations andfairness opinions;

• loan portfolio advisory servicesincluding performance analysis,due diligence and valuation;

• post-merger integration: synergyassessments, planning and projectmanagement;

• human resource and pensionscheme advice; and

• valuations for financial reportingpurposes.

About PwCM&A advisory services in thefinancial services sector

PwC is a leading consulting and accounting adviser for M&A in the FS sector. Through our Corporate Finance,Strategy, Structuring, Transaction Services, Valuation, Consulting, Human Resource and Tax practices, we offer afull suite of M&A advisory services.


About this reportThe main authors of, and editorial team for, this report were Nick Page,a partner and Fredrik Johansson, a director in the Transaction Services –Financial Services team at PwC UK in London. Other contributions were madeby Andrew Mills of Insight Financial Research and Tina Mayo and NatashaPitchacaren of PwC UK.

Geared up for growth?We can help you take advantage of the emerging opportunities forexpansion and acquisition. Find out more about our M&A advisory services at

www.pwc.com/financialservices


Contacts

If you would like to discuss any of the issues raised in this report in more detail please contact one of us below oryour usual PwC contact.

Nick PagePwC (UK)+44 (0) 20 7213 [email protected]

Bojidar Neytchev PwC (Bulgaria)+359 2 9355 [email protected]

Fredrik JohanssonPwC (UK)+44 (0) 20 7804 [email protected]

Ervin Apáthy PwC (Hungary)+36 1 461 [email protected]

Andrew Cann PwC (Russia)+7 495 967 [email protected]

AleksanderKolmykov PwC (Russia)+7 495 287 1138 [email protected]

Piotr Romanowski PwC (Poland)+48 22 746 6706 [email protected]

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extent permitted by law, PwC does do not accept or assume any liability, responsibility or dutyof care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

For further information on the Global FS M&A marketing programme or for additional copies please contact Tina Mayo, Global Financial Services Marketing, PwC UK on+44 20 7212 2371 or at [email protected]

www.pwc.com/financialservices© 2012 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please seewww.pwc.com/structure for further details.

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