By Boris Groendahl
VIENNA, Feb 11 (Reuters) - Western European banks that paid
as much as six times book value for emerging European lenders in
the boom may come to regret their acquisitions as a grim outlook
forces them into big goodwill writedowns.
Morgan Stanley estimates that banks have accrued 30 billion
euros ($39 billion) of goodwill on emerging European lenders
that they bought for more than book value in the past 10 years.
The potential writedowns put further pressure on balance
sheets already strained by falling emerging European currencies
and by the prospect of sharply rising bad debts as the region
slides into recession. []
Austria's Erste Group Bank <ERST.VI> was the first to make
a 570 million euro ($736.9 million) depreciation on Tuesday,
mainly attributed to its Romanian arm BCR. Hungary's OTP
<OTPB.BU>, Belgium's KBC <KBC.BR>, Italy's UniCredit <CRDI.MI>
and Swedbank <SWEDa.ST> could be next in line. []
"Most at risk to be depreciated is goodwill booked on recent
acquisitions at expensive prices in very vulnerable markets,
such as Russia, Ukraine, Kazakhstan and potentially Romania,"
said Francois Boissin, an analyst at Exane BNP Paribas.
Prices ballooned in the boom years of 2005 to 2007 as banks
scrambled to get a foothold in markets where credit was growing
at breakneck rates of 30 percent or more and ventured into ever
riskier places as takeover targets became scarce.
Erste, for instance, paid six times book value for BCR in
2006. UniCredit created more than 3 billion euros of goodwill
when it bought banks in Kazakhstan, Ukraine and Russia in 2007.
Swedbank ran up goodwill when it bought in Estonia and Ukraine.
Even though writedowns do not weigh down regulatory capital
-- goodwill is not considered Tier 1 capital -- and are
cash-neutral, they do drive down earnings further, possibly into
losses, and unsettle investors.
"True, it's not relevant for cash or Tier 1. But the bottom
line is that it is a writedown," said Manfred Sibrawa, who
manages emerging European equity funds for Austria's BAWAG PSK
Invest. "I do think it's a very relevant issue."
BOOK VALUE
Goodwill is difference between the price paid for an
acquisition and its book value and is kept on the buyer's
balance sheet as an intangible asset.
Companies have to justify their goodwill to auditors in at
least an annual "impairment test". The impairment test typically
relies on future cashflow estimates, giving the companies
considerable leeway in their arguments.
Most analysts expect goodwill writedowns to happen later
this year. Erste, however, brought them forward to 2008, a year
in which it had one-off gains from the sale of its insurance
unit that it could use to offset the impairment.
OTP also sold its insurance business last year and may be
tempted to use that one-off gain to smooth out a goodwill hit,
analysts say. The Hungarian bank reports fourth-quarter results
on Friday.
Erste shares traded down as much as 6 percent on Wednesday,
extending a 10 percent drop on Tuesday. KBC, Raiffeisen
International <RIBH.VI> and Greek banks exposed to Romania were
also among Europe's top losers.
"Goodwill depreciation impacts sentiment rather than
valuations," said Exane's Boissin.
"You as the management admit that the profit generation
capacity of your acquisition is no longer valid. It's the
acknowledgement that prospects are no longer as positive."
(Additional reporting by Balazs Koranyi in Budapest and
Niklas Pollard in Stockholm; Editing by Erica Billingham)
