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PZU's planned foreign expansion seen as unlikely by analysts

PZU SA's plans to increase its share of profits from foreign operations over the next few years might be overly optimistic, according to analysts, who told S&P Global Market Intelligence that the state-controlled Polish insurer is more likely to focus on its domestic banking operations as it digests its purchase of a stake in Bank Pekao SA.

PZU wants to increase its share of profits from overseas operations to between 20% and 25% in the coming years from a current 8%, potentially through acquisitions or by building up a bancassurance model through strategic alliances. It is already present in Lithuania, Latvia, Estonia and Ukraine.

Yet analysts were skeptical about this plan, saying PZU is likely to focus on Pekao instead, having acquired a 20% stake in Poland's second-largest lender from Italy's UniCredit SpA in a transaction that also saw Polish development fund Polski Fundusz Rozwoju purchase a 12.8% share in the bank.

"PZU's interest in acquisitions outside of Poland is rather opportunistic," Jaromir Szortyka, a banking and insurance analyst at brokerage PKO BP, said in an interview. "They are concluding the Pekao transaction, which will deploy all their excess capital. They do not have the firepower for acquisitions abroad."

PZU is financing the deal with its own cash but is mulling a subordinated debt issue of up to €500 million to stick to its Solvency II target of 200%, which is well above regulatory requirements. The Pekao acquisition decreases the ratio to 180%.

"After the acquisition, they will have a capital deficit — not from a regulatory point of view, just from their own target," said Kamil Stolarski, a sell-side equity analyst at Haitong Bank in Warsaw. "I see little possibility of them making investments abroad," he told S&P Global Market Intelligence, adding that there was a lot of uncertainty swirling around the insurer due to the recent sacking of its CEO, Michal Krupinski.

Strengthening in existing markets

If an opportunity abroad presented itself, PZU would likely aim to build on its investments in countries where it already has a presence, according to Marcin Materna, head of research at brokerage house Millennium.

"They will try to strengthen their position in the countries where they are already present — the Baltic states and Ukraine," he said in an interview. He added that he also expected PZU to put its foreign acquisition plans on the back burner, with the focus being Pekao and Alior Bank SA, a lender it acquired in 2015.

While Alior was previously seen as a conduit for PZU to increase its hold on the banking sector, that role will likely be taken up by Pekao given its size and scale, Szortyka said.

Materna said he expected PZU to increase its focus on bancassurance domestically, with increased cross-selling between its subsidiaries in an attempt to boost Poland's bancassurance market, which has lagged its European peers due to hefty regulation and a dearth of products. For example, the banking units might start selling PZU insurance products and PZU asset management products, he told S&P Global Market Intelligence.

"This is the only way that the purchase of these banks makes sense," he added.

Politics influencing acquisitions

The insurer could free up capital for potential acquisitions by capping its or Pekao's generous dividend policies, Stolarski said, adding that it may also use the latter's excess capital for potential acquisitions, although it would depend on what the state has in mind for both companies. Investors have been concerned that PZU might reduce its dividend, but the insurer has said several times it aims to pay out dividends of more than 50%.

"Pekao would be the best tool to deliver as they have the most excess capital," he said.

PZU's acquisition of the Pekao stake is part of the Polish government's strategy to "repolonize" the country's banks, which are 60% owned by foreign lenders, and the state's influence is seen as pivotal to PZU's attitude to future acquisitions.

"Politics are the most important thing here, so it makes things very difficult to predict," Stolarski added. "The final decisions will be taken by the government."

He said the state's focus is more likely to be on the domestic market, adding that the government might want to use PZU as a vehicle "to boost GDP growth and increase development in Poland."