The potential sale of Deutsche Bank Polska SA will help the winning bidder gain scale and use its excess capital, in addition to boosting consolidation in a fragmented Polish market, according to analysts.
Deutsche Bank AG, which wants to shed noncore assets to shore up capital, is reportedly seeking to sell the unit, with Banco Santander SA's Bank Zachodni WBK SA and Millennium BCP's Bank Millennium SA left in the running after Commerzbank AG's mBank SA recently dropped out of the race. The Polish banking market has been the focus of tie-ups in recent years, with most of the largest banking groups the result of mergers.
"People think there will be more consolidation. This is something [that] has been in place for many years — I see no reason why this should stop," said Kamil Stolarski, a sell-side equity analyst at Haitong Bank in Warsaw, adding that Deutsche Bank Polska was among the businesses tipped for consolidation.
"I am sure that there are willing buyers, but it is always a question of the price," he said, adding that one of the main reasons for mBank dropping out of the bidding process could have been pricing. In addition, the acquisition may not really have fit the bank's profile as a fast-growing online and mobile bank, according to Stolarski.
Deutsche Bank is expected to sell its Polish unit at a sharp discount to book value because of its weak profitability and due to the fact that it will have to split up assets. Press reports have valued the subsidiary — which posted pretax income of €14 million in 2016, according to the parent's annual report — at around €400 million.
Stolarski said the purchase would allow both BZ WBK and Bank Millennium to increase their scale by growing their deposit and client base, in addition to their range of products. If successful in its bid, he would expect BZ WBK to close Deutsche Bank branches and overhaul its IT systems, while Bank Millennium would be able to give the lender more exposure to larger corporate clients, as the Deutsche unit currently focuses mostly on small and-medium-sized businesses.
Deutsche Bank Polska, Santander, Millennium BCP, Commerzbank, mBank, Bank Millennium and BZ WBK all declined to comment on the potential sale.
Capital surplus
Both BZ WBK and Bank Millennium are exposed to foreign-exchange-denominated mortgages, as is Deutsche Bank Polska. Many Polish homeowners signed up for Swiss franc-denominated mortgages to benefit from low rates before the 2008 financial crisis but were left paying much higher mortgages when Switzerland unpegged its currency from the euro in early 2015, triggering an almost instant 40% appreciation.
The Polish government has been toying with different measures to ease the burden on homeowners, and President Andrzej Duda recently proposed the creation of a restructuring fund financed by lenders. However, the Deutsche Bank Polska sale could provide a silver lining for lenders exposed to foreign-exchange mortgages.
Higher capital requirements set by regulators earlier in 2017, as well as restrictions on dividend payments by banks with foreign-currency-denominated mortgages imposed by the Financial Supervision Authority in December 2016, have meant that most lenders have not been paying out dividends and have thus been amassing capital.
"The biggest benefit we see, other than potential bargain on purchase, is that the banks interested would put their surplus capital to work," Mateusz Krupa, an equity analyst at Erste Securities Polska, wrote in an email. "Currently, the Polish banks with significant FX-mortgage portfolios have strong dividend restrictions from the Polish regulator that make their capital ratios look rather excessive," he added, noting that this is putting pressure on banks' return on equity.
ROE at BZ WBK was 11.0% at the end of June, down from 11.6% a year earlier, while Bank Millennium's ROE was 9.6% at the end of June, down from 13.1% a year earlier.