BNP Paribas Market Cap (as of 07/12/13): €65.77bn
Rabobank Market Cap (as of 07/12/13): N/A (not listed)
BGZ Market Cap (as of 07/12/13): €927.48mln
Back in 2011, the sovereign-debt crisis that hit Europe caused U.S. investors to cut back on lending to European banks. France’s BNP Paribas struggled at first but managed to recover and recapitalize in order to be able to comply with the new regulatory measures of the upcoming Basel III standards. Among other requirements, Basel III imposes a tier one capital ratio of 6% or higher. Global systemically important banks as BNP will have to comply with additional charges, in the French bank case amounting to an extra 2% of capital as it was placed in the 3rd bucket in November, together with Barclays, Citigroup and Deutsche Bank. In September 2013, BNP Paribas had a tier one capital ratio of 10.8 per cent, much higher than the 9% targeted in May 2012.The result looks particularly good when compared to its French rivals, 9.9 percent at Societe Generale and 10.5 percent at Credit Agricole. Since the bank is finally well capitalized, it needs to deploy its capital efficiently in order to provide its investors with the returns they deserve. Two most recent events signal the focus shift from reconstruction to trying to increase its earnings and growth.
In November 2013, the €3.25bn deal to buy out 25 per cent of Fortis, held by the Belgian government, was a very important signal of BNP’s improved health. The Belgian government represents BNP’s largest shareholder (it owns 10.3 per cent) and it has plans to make various divestments and eventually decrease its stake in BNP Paribas as well. On the other hand, it will not get rid of the totality of its stake in BNP in order to retain influence on the old Fortis operation. Belgium has invested quite heavily in its banks during the crisis in order to keep them viable and afloat, but it is now in a dire need to cash out for the sake of the taxpayers. It has in fact a 100% debt over GDP ratio and, most importantly now, a recently worsened 4% deficit (hence the need to liquidate some of this stakes). After the Fortis deal, BNP’s core tier one capital ratio fell from 10.8 per cent to 10.3 per cent but the drop was compensated by a positive effect on earnings.
In October 2013, BNP Paribas, together with Italy’s UniCredit and Spain’s Banco Santander, submitted a bid of close to €1bn for Rabobank’s Polish subsidiary, BGZ(Bank GospodarkiŻywnościowe). Last Thursday, on December the 5th, BNP Paribas announced that they will buy 98.5 per cent of BGZ from Rabobank for $1.36bn, which represents a 14% premium to its closing price on Wednesday, December the 4th, on the Warsaw Stock Exchange.The relatively low premium can be explained by the fact that Rabobank is facing $1bn charges for trying to manipulate the LIBOR and it was thereforewilling to accept a smaller premium, cashing in $1.36bn. Rabobank is also seeking to refocus and divest non-core activities, much like the vast majority of financial institutions throughout Europe and the US, in an effort to reach a 14% CT1 ratio by 2016. On the other hand, BNP is trying to improve the return for its investors and that is why they want to expand into faster-growing markets. Furthermore, since BNP already operates in Poland, buying BGZ could help the bank consolidate its existing position. The group will become one of the major players in Poland (with a market share in Polish retail banking of about 5%) and consequently achieve a competitive advantage on its competitors. The integration of BGZ with the existing Polish operations has a clear scope for cost synergies as the banks cut overlapping overheads in favor of a slimmer cost structure, with an inevitable boost of its profitability. The deal is expected to be immediately earnings accretive (EPS currently stand at 4.12€) while its impact on the core Tier 1 ratio is slightly negative (-15 basis points). BNP shares were up 0.6% on the announcement on Thursday.
The Polish banking sector is extremely interesting within Central Europe emerging economies. According to research published by Deloitte at the beginning of 2013, it is in fact the one with the lowest banking penetration and the most heavily focused on the domestic economy, which has been steadily expanding and it is expected to continue to do so in the near future. Put the two together and the potential for growth is clear, as is the rationale behind this acquisition for BNP. It can also be reasonably expected that existing market players will be in the best position to profit from the situation, as opposed to potential newcomers in the market.
In order for the deal to be completed, BNP Paribas is seeking approval from the local financial regulator, KNF, which is yet to provide a decision. However, KNF seems to be skeptical about any further consolidation in the Polish banking sector and it is seeking for athorough explanation as to why Rabobank decided to change its strategy and go for the 98.5 per cent stake transfer. The transaction, if approved, will strengthen the capacity of BNP Paribas in Poland by providing its customers with a full range of services as BGZ specializes in the agricultural& food businesses and in e-banking while the Polish BNP operations are specialized in retail and corporate businesses.