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State influence hangs over PZU’s dividend promise

Poland's largest insurer, PZU SA, promised investors Oct. 4 that it would continueto pay out at least 50% of its profits as dividends through 2020. But thePolish government, which holds a controlling 34.19% stake in the firm, may intime force the insurer to break that promise, one analyst said.

"Given what's happening with the governance of statecompanies in Poland, I'm not so sure that the market should just take thisguidance and run with it," said Deutsche Bank analyst Marcin Jablczynski.He pointed to a recent report that Poland's government, elected a year ago inpart on a promise to increase the state's role in the economy, is unfairlyfavoring state-run utility companies and in turn depressing the value ofprivate utility firms.

"There are some worrying examples of corporategovernance [in Poland]," Jablczynski said in an interview. "I thinkPZU would like to maintain at least [a] 50% payout, but the state makes all theimportant decisions here."

Earlier in the year, PZU said it would aim to build a "top five" Polishbank with assets of at least 140 billion zlotys in 2020 by using its unit to acquiremore lenders. This banking business should bring profits of about 450 millionzlotys by the end of the decade, it said.

The move into banking was seen as part of the government'splan to put control of the Polish banking sector, which is dominated by foreignlenders, back into local hands. Alior bought Bank BPH SA from General Electric Co. earlier in theyear, and it began exclusive negotiations in mid-September to pick up thebanking business of RaiffeisenBank International AG's Raiffeisen Bank Polska SA.

PZU CEO Michal Krupinski said the company would use itsexcess capital, estimated by Deutsche Bank's Jablczynski at between 7 billionand 8 billion Polish zlotys, to fund acquisitions in the banking and insurancesectors. PZU considers capital above that required to maintain a 200% SolvencyII ratio to be excess; it reported a figure of 281.5% at the end of 2015.

PZU also said it could allocate as much as 30% of a givenyear's profit to fund M&A activity and up to 20% to fund organic growth andinnovation, although it held out the possibility of paying all of its earningsfor a year as dividends. It reported full-year 2015 net profit attributable toowners of the parent entity of 2.34 billion Polish zlotys, down from a restated2.97 billion zlotys a year ago.

Krupinski said the RBI purchase would not affect PZU's dividend, but hedeclined to comment on discussions with UniCredit SpA over the rumored purchase of most or allof the Italian bank's 40.1% stake in Bank Pekao SA, a leading bank in Poland.

Publicly traded Bank Pekao was valued as a whole at 33.38billion zlotys as of Oct. 4. PZU's purchase would reportedly be by capital from the Polish DevelopmentFund through a special-purpose vehicle.

Raiffeisen Bank Polska is not listed separately.

Jaromir Szortyka, an analyst with PKO BP, which like PZU isstate-controlled, said in an interview that investors should be reassured bythe "strong intention" of PZU's management board to keep the 50%dividend payout. He said the purchases of Bank Pekao and Raiffeisen Bank Polskacould be financed without breaching either the 200% solvency II limit or the50% dividend payout ratio. But he also said he does not expect PZU to buy anyinsurance companies "in the near future."

PZU shares closed up 7.13% on Oct. 4 at 26.13 zlotys apiece,outstripping the 1.66% gain recorded by the WIG20 index of leading Polishcompanies.

As of Oct. 3, US$1 wasequivalent to 3.83 Polish zlotys.