Banking M&A Digest #2

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About anyone and anything anywhere related to banking and making money with money - 

by Aivars Jurcans

Buying, Selling, Merging

British billionaire and former stock broker Michael Spencer is reported as being in advanced talks to acquire controlling interest in Singapore Life, an insurance company, for USD 50 million. Established in 2014, Singapore Life which sells life insurance online and through selected banks and brokers has been the fastest growing life insurer in Singapore with USD 4.8 billion of coverage sold since becoming operational in 2017.


Banco BPM has announced a sale of EUR 7.8 billion portfolio of “worst of the worst quality” loans (the Italian term of that is “sofferenze”) to Elliott Management, a New York based hedge fund group. This is already the second transaction between the parties – the first one involving EUR 5.1 billion of loans took place in June – and makes Elliott the largest holder of non-performing loans in Italy. The second transaction would reduce the BPM’s NPL ratio from 15.9% to 10.6%. The remaining NPL portfolio on the balance sheet of the bank is estimated at EUR 3.5 billion.


Deal Ideas Cooking

In view of the money laundering scandal and the disappointing share price performance (more on that below) the not-so-new idea of merging Deutsche bank with Commerzbank has again been gaining some traction. This debate has been on and off almost since the German government became a shareholder in Commerzbank but was most active after Cerberus who is the largest private shareholder in Commerzbank purchased a stake in Deutsche bank in 2017.

The German finance minister has previously expressed support to the country’s need for strong banks to support export-oriented economy but there have been no recent official comments. According to media, Deutsche’s management is not enthusiastic about the idea since, because of its low share price and poor operational performance, it is likely to be the weak party to a merger. For management a more acceptable solution would be to merge with a non-German party that would rather complement its current business. But, again, because of the share price performance, Deutsche bank is likely to be a junior party to such a transaction.


Iceland government is expected to announce a plan to sell its stakes in Islandsbanki hf and Landsbankinn hf, both set up after collapse of the country’s banking system 10 years ago.


Julius Baer, the Swiss private bank, is reported as being in discussions to sell or otherwise transfer its Venezuelan business to Banco Santander. Previously Julius Baer had already announced closing its operations in Peru and Panama with a view to concentrate on larger markets in the region – Mexico, Brazil and Argentina. Swiss media have already reported that Baer had ended relationship with clients having less than USD 1.5 million in assets in Venezuela earlier this year and that its remaining business portfolio consists of clients with assets in excess of USD 20 million.


According to Financial Times, Alfa-Bank, Russia’s largest private bank measured by assets, has been exploring possible sale with both VTB and UniCredit. The sales price asked is reported to be in the range of USD 7 – USD 8 billion which is marginally above the bank’s book equity of USD 7.1 billion. Alfa-Bank has denied any discussions regarding the sale, claiming no intention to sell while the bank is generating return on equity of 13-14%.


Banco BPM, Italy’s third largest lender’s, sale of NPL portfolio (see above) is expected to reopen discussions about the mergers between Italian medium sized banks. One of the potential transactions could involve merging Banco BPM with the 4th largest bank by assets, UBI Banca, to create a major financial institution focused on the Northern regions of Italy. The possibility of having a 3-way merger with Banca Monte dei Paschi di Siena which was rescued by Italian government in 2017 is also being discussed.

Banco BPM shares have been trading at a 70% discount to its book value of equity.


Ripple Effects

In the unfolding money-laundering story involving the Danske Bank’s Estonian branch, the true scale of Deutsche Bank’s involvement has gradually been revealed. Apparently Deutsche has cleared almost 80% of the total EUR 200 billion over the course of 8 years, or has handled c.1million individual transactions.

At the end of last week Deutsche bank’s shares were already trading at 55% down from their last 12 months peak and at a price-to-book ratio of 0.27x. While the bank is likely to meet this year’s cost-cutting objectives there is doubt about its ability to achieve a 4% return on equity target in 2019. Still, Deutsche bank’s ratio of overheads to revenues still remains at more than 90%, among the highest in sector, and the planned 8% reduction in 2018-2019, even if successful, is not going to be such a drastic improvement.


The US Department of Justice has not yet found any confirmation that Danske bank had provided services to those under the US sanctions. Nevertheless, the bank has already put aside a reserve of USD 2.7 billion or 85% of its last year profits against potential penalties.


Valued by Markets

According to Bloomberg, looking at trading multiples is not very complimenting to the major European banks as the only one trading at around its book value is UBS, followed by Credit Suisse at around 0.7x times book.

In comparison, the American banks are almost in a different league – Morgan Stanley, BofA and, especially, JPMorgan (around 1.6x!) are well above the book value while Goldman Sachs and Citi are close to the 0.9x mark.

Major European banks, Societe Generale, Standard Chartered and Barclays, have lately been  trading in the range of 0.4x-0.5x times their book value, while Deutsche bank at 0.27x book is at the very bottom of the table at the moment.

According to Financial Times, HSBC, RBS, BNP Paribas, Barclays and Deutsche bank, the top 5 European banks at the time, reported combined net profit of USD 60 billion in 2007 which put them significantly ahead of JPMorgan Chase, BofA, Citigroup, Morgan Stanley and Goldman Sachs. Ten years later, in 2017, the Europeans reported net profits of USD 17.5 billion which was far below of the net profit generated by JP Morgan alone (USD 24.4 billion). Moreover, the market capitalisation of JP Morgan – USD 380 billion – is higher than that of its 5 European competitors combined.


Credit Suisse’s share price has dropped 27% over the last 6 months, an even larger decline than seen by Deutsche bank and UniCredit over the same period.

To revive its share price Credit Suisse is expected to announce a share-buyback program and increase the dividend. It is speculated that the buyback might total USD 3 billion, while the bank has publicly stated its intention to pay out 50% of its earnings as dividends over the next 2 years.


Rule Book

At President Macron’s request to appease the”yellow vest” protests all major French banks have agreed to freeze banking fees and set a cap on overdraft fees for poorest customers. This is expected to add EUR 500 to 600 million to the client’s spending power. The effects of this on the bank performance and share price have not been estimated yet.


The European Bank for Reconstruction and Development (EBRD) is planning to introduce “no coal, no caveats” policy and to reduce lending to oil exploration. The bank intends to finance only such upstream oil projects that would reduce emissions. It will continue financing gas projects but the focus of its lending is likely to switch to renewables, like wind and solar energy.


Important Numbers

Wealth amounting to almost USD 25 trillion is controlled globally by 175,000 ultra high-net-worth individuals (defined as those with more than USD 30 million of wealth).


A Thought Worth Noting

“When 10-year [US Treasury bond} yields are going up people buy bank stocks. And the other way round. That’s all they care.”

Jim Cramer

See you again next time!

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