• Success boils down to how well the merger is managed and whether the new owner will be able to keep key clients interested.
Last year, Greek-owned United Bulgarian Bank (UBB) was bought by Belgian banking and insurance group KBC for a record 610 million euro, or approximately 1.2 billion levs. This year, another billion-lev deal is in the offing, with the context slightly different. Whereas the sale of UBB was a solution to problems of its then-owner National Bank of Greece (NBG), this year France's Societe Generale is selling its Bulgarian subsidiary Expressbank for strategic reasons. Societe Generale says a sharper focus is needed on its key markets, however pressure is also a factor as shrinking margins and tightening regulations make it harder for smaller banks to make a profit. The call for action was answered by Hungarian banking group OTP through its Bulgarian subsidiary DSK Bank.
Though the price has not yet been made public, inside information provided to Capital newspaper points to a ratio of about 1.3 times SG Expressbank's asset worth, which is close to 500 million euro, or 975 million levs. The fact that Societe Generale can receive a coefficient as high as 1.3 is a solid proof that the bank has no skeletons in its closet. OTP may be willing to go beyond that sum, though, as Expressbank is being sold in a package with the Albanian subsidiary of Societe Generale - the fifth largest bank in Albania. The end-game? A merger to consolidate market share and facilitate synergy.
The birth of a new leader
Technically speaking, combining the assets of the third largest Bulgarian bank, DSK, with the seventh largest, Societe Generale Expressbank, would create a giant worth 19.4 billion levs, which is about 500 million levs above the assets of the current market leader, UniCredit Bulbank. When it comes to banking though, things are not that simple, least of all because finalizing the deal is set to come at the end of 2018, whereas the merger itself could take at least one more year. Many shifts in the rankings can take place within such a wide time frame.
Moreover, changes in ownership often lead to an outflow of clients. Especially when the buyer is considered riskier and has a lower credit rating than the acquiree. Fitch has said that it plans to monitor and possibly downgrade Expressbank rating of A- to BB following the finalization of the deal, because the prospective new owner is considered less capable of offering support if necessary. Unlike Societe Generale, OTP is based in Hungary - a country outside the Eurozone where the government has been criticized for tampering with the independence of the central bank. Therefore, it can be expected that some multinational companies may start turning to other banks for refinancing.
There is also an upside for DSK Bank, which, following the merger, will reinforce its importance within the OTP Group. Currently, DSK Bank stands as the second-largest after its Hungarian parent, accounting for 15% of the group's consolidated assets.
Supplementing banking
The expected merger will not only strengthen DSK's banking services but also other financial services offered by the local subsidiaries of Societe Generale included in the transaction - leasing company Sogelease Bulgaria, Societe Generale Factoring and life insurer Sogelife Bulgaria, among others. Currently, DSK has in its group a pension company ranking third by market share, a leading mutual funds management company and a leasing company. In addition, the acquisition of Sogelife Bulgaria will mark a return for DSK to insurance - a sector which the group has been working in only through partnerships since 2008.
Speculation aside, final plans remain unknown. Both parties to the potential deal have so far refused to make any additional comments outside of the terse press releases. However, it is highly likely that the merger will be run in Bulgaria by Violina Marinova, the long-standing CEO of DSK Bank, given that her tenure was extended in July until the end of 2021.
Lingering hurdles
Regulatory approvals will be necessary following the signing of the agreements for the acquisition of Societe Generale's Bulgarian and Albanian units before finalizing the deal by the end of the year. In Bulgaria, first comes the central bank, BNB, though no blocking action is expected given that the central bank has been encouraging consolidation in the financial sector for a long time now. The Financial Supervision Commission will also have a say because there is an insurance company involved in the deal, but here the decision is also more of a formality rather than an expected obstacle.
A more serious stumbling block could be the Commission for the Protection of Competition, particularly in light of its recent unprecedented bans on the sale of the Bulgarian assets of Czech energy giant CEZ and one of the largest media conglomerates, Nova Broadcasting Group. Moreover, those decisions were announced with little to no explanation given that neither deal would lead to an increase in market share for the buyers. Merging DSK Bank and Societe Generale Expressbank would create a giant in retail banking, with a combined market share of 27% in mortgage lending and 37% in consumer loans. A market share of over 25% may give the anti-trust authority a reason to interfere, citing the risk of abuse of dominant position.
• Success boils down to how well the merger is managed and whether the new owner will be able to keep key clients interested.
Last year, Greek-owned United Bulgarian Bank (UBB) was bought by Belgian banking and insurance group KBC for a record 610 million euro, or approximately 1.2 billion levs. This year, another billion-lev deal is in the offing, with the context slightly different. Whereas the sale of UBB was a solution to problems of its then-owner National Bank of Greece (NBG), this year France's Societe Generale is selling its Bulgarian subsidiary Expressbank for strategic reasons. Societe Generale says a sharper focus is needed on its key markets, however pressure is also a factor as shrinking margins and tightening regulations make it harder for smaller banks to make a profit. The call for action was answered by Hungarian banking group OTP through its Bulgarian subsidiary DSK Bank.
