European, U.S. banks pay more for emerging assets http://today.reuters.com/news/articleinvesting.aspx?type=mergersNews&storyID=2006-10-18T165015Z_01_L18881200_RTRIDST_0_FINANCIAL-BANKS-EMERGE.XML
Wed Oct 18, 2006
By Andrew Hurst
ZURICH, Oct 18 (Reuters) - Cash-rich European and U.S. banks appear willing to pay ever higher prices as they scramble to buy emerging market assets in the hope of cashing in on rapid growth.
Credit analysts say, however, they are confident the big banks will be able to manage their new acquisitions.
With little left to acquire in eastern Europe, where most banks are now owned by foreigners, banks have been shifting their interest further afield to Russia, Ukraine, Turkey and now Egypt.
"All these countries have large populations where wealth levels are improving and you are seeing a rise in the middle class," said John Gibling, director of financial institutions ratings at Standard & Poor's.
Italy's Sanpaolo (SPI.MI: Quote, Profile, Research) bought 80 percent of Egypt's Bank of Alexandria for $1.8 billion at auction on Tuesday, paying 5.5 times the Egyptian bank's book value -- one of the highest multiples yet seen for an emerging market deal. The deal comes as Sanpaolo merges with Banca Intesa (BIN.MI: Quote, Profile, Research) to create one of Italy's biggest banks.
Also on Tuesday, Citigroup (C.N: Quote, Profile, Research) agreed to buy 20 percent of Akbank (AKBNK.IS: Quote, Profile, Research), one of Turkey's largest banks, for $3.1 billion in another pricey deal.
"If you bear in mind the bank (Akbank) has high capitalisation and that a controlling stake is not being sold, the multiple being paid is a generous one," said Yavuz Uzay at Credit Suisse in London.
Uzay said the deal was priced at 3.4 times Akbank's June 2006 reported book value after adjustment for a proposed capital increase.
BETTING ON GROWTH
Foreign banks are betting on Turkey's growth potential whether or not it joins the European Union, say analysts.
"Turkey's household credit to GDP is 9 percent, whereas in central and eastern Europe it's on average 17 percent. In key European countries it's close to 50 percent, and in the U.S. and UK it's more than 90 percent," said Uzay.
"This supports the argument for buying into Turkey. It's a very attractive market from a growth perspective," he said, even though analysts say sovereign risk spreads suggest Turkey has a higher risk profile than eastern Europe.
The high prices paid by banks such as Citibank and Sanpaolo are based on the assumption that high growth will allow them to recoup their investment. "Historically, you pay 1.5 to 2.5 times book value. When you go above that, the rationale is based on future growth," said Bertrand Lavayssiere, managing director of Global Financial Services at Capgemini in Paris. The premiums also reflect a shortage of attractive emerging market banks on the market.
"We are seeing high acquisition multiples due to the scarcity value and the fact that most banks are cash-rich. This makes the market a seller's market," said Alessandro Roccati, an analyst at Fox-Pitt, Kelton.
Roccati estimated that Sanpaolo and Banca Intesa would have more than 8 billion euros in excess cash after their merger.
"European banks are also looking for growth in central and eastern Europe and emerging countries because growth in domestic markets is likely to slow down in the next year or two," said Roccati.
Confidence is high among ratings agencies that big European and U.S. banks can manage the acquisitions as long as they remain relatively small in proportion to the buyer.
"It does not become a problem for us from a rating perspective unless the takeover targets become seriously large, and even then the transaction would have to be handled badly," said Gerry Rawcliffe, managing director for Financial Institutions at Fitch Ratings.
"We are not seeing the kind of messes being made that we saw maybe a decade ago. Banks have upped their game in terms of integrating the banks they acquire," he added.
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