* EU pressure, balance sheet cleaning may yield asset sales
* Prices have dropped to less than twice book value
* Strong incumbents, new entrants seen as buyers
* "Banking landscape will look different in 3 years"
By Boris Groendahl
VIENNA, June 29 (Reuters) - Emerging Europe's banking sector
is set to offer opportunities for banks like Deutsche Bank
<DBKGn.DE>, Santander <SAN.MC> and HSBC <HSBC.L> to snap up
assets from western rivals or homegrown lenders facing bad debt.
Consolidation ground to a halt by 2007 when a decade-long
acquisition and privatisation rush dried up at high prices that
reflected bumper credit and profit growth rates in the region.
But a window of opportunity will open for buyers as western
banks active in the region clean their balance sheets or turn
their focus back to domestic markets under regulatory pressure.
"There is a number of banks on sale at least informally,"
says Debora Revoltella, head of strategic analysis at Italy's
UniCredit <CRDI.MI>, emerging Europe's biggest bank by assets.
"And there is a number of banks which didn't enter the
region before because they missed the boat to build a franchise.
Those could include Deutsche Bank or Spanish banks," she said.
Some of the big names who lost out on emerging Europe had
balked at prices which topped out at six times book value for
some deals in 2006 and 2007, but they may find better value now
as the region's banks are hit by a surge in bad debt.
"The banking landscape will be different in in three years'
time," said Cristina Marzea, an analyst of emerging European
banks at Merrill Lynch.
Hardly any bank active in the region is now trading at more
than twice book value, with some still lingering at less than
book value according to Reuters data.
"Whoever has cash now will get quite some opportunities, I'm
not saying lifetime opportunities, but there are interesting
assets at interesting prices," Marzea said.
Western banks own the biggest lenders everywhere in the
former Communist part of Europe apart from the former Soviet
Union and Hungary, which has produced the only homegrown lender
active across the region, OTP <OTPB.BU>. []
UniCredit and Austria's Raiffeisen International <RIBH.VI>
and Erste Group Bank <ERST.VI> top the list of the biggest banks
in the region by some distance. France's Societe Generale
<SOGN.PA> and Belgium's KBC <KBC.BR> are next in line.
EU, MARKET PUSHES FOR SALE
Investment bankers and analysts looking at the region say
that the banks which have sounded out possible buyers fall into
three main categories.
The biggest chunks could come up for sale because the
European Union may demand western banks scale back business as a
condition to approve state aid they received.
This could happen to Germany's BayernLB [], which
owns Hungary's fourth-largest bank MKB and, through its Austrian
unit Hypo Group Alpe Adria, some of the biggest lenders in the
former Yugoslavia. Together, BayernLB's emerging European banks
have assets of 29 billion euros. []
KBC, with assets of 67 billion euros in the region, is also
probed by the EU for the state aid it got to plug holes ripped
open by its exposure to U.S. monoline insurers, and may sell at
least parts of its network. []
The EU is walking a fine line between ensuring competition
on the one hand and financial stability in the region on the
other.[]
A firesale of assets under EU pressure in some of the
worst-hit countries like Hungary could undermine efforts to
stabilise the region. However, if a major new name were to buy
into it, this could also be seen as a big vote of confidence.
A second group of possible sellers include those who may not
be under regulatory pressure but need to clean up their balance
sheets and refocus business and management attention on core
units -- especially if they are only also-rans in the region.
"Everybody who is sub-critical mass is going to have another
look at its strategy in this market," said one investment banker
who declined to be identified because he is advising clients in
the region. "If there is no network, no strategy, this is just
eating up management time and doesn't go anywhere."
This includes Royal Bank of Scotland's <RBS.L> tiny Romanian
business, Citigroup's <C.N> Polish arm Bank Handlowy <BAHA.WA>,
Allied Irish Bank's <ALBK.I> Bank Zachodni WBK <BZWB.WA> and
Commerzbank's <CBKG.DE> BRE Bank <BREP.WA>.
The Polish banks mentioned have market capitalisations
between $5 billion and $6.5 billion.
And finally there are locally owned lenders such as
Romania's Banca Transilvania <BATR.BX>, market cap $400 million,
where the pressure on owners to raise capital may accelerate a
possible sale that analysts have pencilled in for a long time.
GROWTH TO RETURN, PRICES LOW
Despite the region's bad press at the moment -- a deep
economic contraction and financial stability risks because of
widespread lending in hard currencies -- it is poised to get
back on to a growth track in the long run.
Low costs and a skilled workforce will help push a surge in
exports when western Europe, its top market, recovers. The
region's allure for western banks also lies in the fact that
millions still do not have a bank account or access to the most
basic banking services.
Analysts have long noted the nearly complete absence of
Deutsche Bank in the region -- apart from some Russian business
-- and the biggest German lender is currently looking at some of
the assets on the market, several investment bankers said.
The same is true for Spain's Banco Santander <SAN.MC> and
HSBC <HSBC.L> with their long-standing experience in other
emerging markets.
Among the banks who are already there, those with strong
balance sheets like Intesa Sanpaolo <ISP.MI> and Societe
Generale or those who just raised fresh cash like National Bank
of Greece <NBGr.AT> or Poland's state-controlled PKO BP
<PKOB.WA> could use the opportunity for bolt-on acquisitions.
[] []
The big uncertainty that could make both sellers and buyers
hesitate at the moment, however, is how bad the current crisis
will be -- by how much and for how long bad debt will rise, and
whether bank runs or country defaults can be avoided.
And in the process, the pricing ideas of prospective buyers
and sellers will need to converge as well.
"It needs to be a good deal from a valuation perspective
because the sentiment is still pretty negative on the region,"
said Merill Lynch's Marzea. "But maybe if there is one first
mover it will be easier for the second or third mover."
(Additional reporting by Marius Zaharia in Bucharest, Patricia
Uhlig in Frankfurt, George Georgiopoulos in Athens, Steve Slater
in London, Andras Gergely in Dublin, Anne Jolis in Brussels,
Chris Borowski in Warsaw)
(Editing by Sitaraman Shankar)
