The takeover by Bank of Cyprus of 80% of Uniastrum Bank in Russia for EUR371 mln in cash is seen by a host of analysts polled by the Financial Mirror as a fantastic deal, which reflects the strength the bank’s management has in identifying a great opportunity and proceeding with the acquisition that will significantly improve the future prospects of Cyprus’ largest lender.
Citigroup: attractive purchase
Citigroup says the acquisition is equivalent to a multiple of 3.1x price-to-book including the capital increase of $50 mln at the closing of the transaction (3.6x pre capital increase).
This purchase is consistent with BoC’s ambition to compliment its existing Russia-dominated offshore business in Cyprus with an onshore presence in Russia. The acquisition is manageable in the context of BOC’s balance sheet and gives it access to licenses nationwide.
Uniastrum Bank is an SME bank with a nationwide presence. It will be a separate legal entity to Bank of Cyprus’ existing Russian bank, which is a Moscow-based corporate bank. There should clearly be synergies between these two operations, on both costs and revenues. The group also includes a brokerage subsidiary, a sister bank in Armenia and an affiliate, the Unistream money transfer network.
The two founding shareholders (George Piskov and Gagik Zakaryan) retain a 20% stake and have an attractive upside if they achieve (undisclosed) targets. However, since BOC has no experience or capacity to grow a Russian universal bank, Citigroup says the key challenge will be to retain Uniastrum’s top executives.
Citigroup maintain their Buy/Medium Risk (1M) recommendation on BOC with a target price of EUR15. BOC is trading at a PE of 8.2x 08E and 6.6x 09E versus 8.9x 08E and 7.5x 09E for the European banks sector. BOC remains one of Citi’s top picks in the Hellenic region.
Attractive acquisition
JP Morgan sees this as a strategically positive acquisition giving BOC the necessary scale and a ready banking franchise to support targeted expansion in Russia. Until now BOC had one branch in Moscow (with a loan portfolio of EUR131mln) and it targeted 16 branches (and a loan portfolio of EUR2.5bln) by 2010; the acquisition of this 50th largest Russian bank by assets gives BOC a ready EUR0.9bln in net loans (as of end-2007) and the ninth largest network of 222 outlets present in the most economically active regions in Russia.
Additionally, Uniastrum's liquid balance sheet with 87% net L/D ratio (2007) complements BOC’s existing 83% (Q1’08). As per BOC, the acquisition will be earnings accretive from 2009 and will achieve an ROI of >10% by 2010. JPM understand from market reports that Uniastrum reported losses in 2006 and 2007 as a result of high operating expenses resulting from its regional expansion. Uniastrum has a young branch network with >70% of its branches ‘immature’ (<5yrs old) that could be expected to deliver increasing returns over years though JPM will look forward to seeing evidence of the claimed speed and extent of this earnings delivery. On a proforma basis, Uniastrum would contribute about 9% to BOC’s including Uniastrum 2007 operating earnings.
BOC projects its 2008 Tier 1 ratio post acquisition at 7.5% which looks slightly low, compared to the current 8.9% pre-acquisition. However, overall CAR is still projected by the group at a sound 12% post-acquisition.
“On our current estimates, the BOC stock is trading at a low 9.1x08E, 7.1x09E, 5.4x10E earnings and 2.0x08E, 1.6x09E & 1.4x10E book. We currently estimate an EPS growth of 5%, 28% and 30% yoy and ROE of 24%, 25% and 27% in 08E, 09E and 010E, respectively.” JPM has an overweight recommendation on BOCY with a price target of EUR 8.20.
Synergies look promising
Keefe, Bruyette & Woods Limited (KBWL) said the announcement comes on the same day that the Central Bank of Cyprus announced its decision to reduce the minimum liquidity ratio in Euro denominated currency from 25% to 20%. More importantly the bank has stated that the Central Bank has submitted a draft plan which would reduce the minimum liquidity requirement from 75% to 70% for all foreign currency in Cyprus. This would allow BOC to redeploy excess domestic liquidity abroad, funding accelerated loan growth in Russia. Funding is one of the main issues for mid-sized Russian banks, this deal will therefore allow for funding synergies as BOC re-channels excess liquidity to Russia.
One of the main drivers of earnings in Cyprus is the offshore business, mainly due to Cyprus' double-tax treaties, especially with Russia. This means that the bank already has a large customer base in Russia, brand recognition and a 10-year presence through a representative office. The existing business in Russia produced a profit after tax for the first quarter of 2008 reached EUR0.2mln and the loan portfolio reached EUR131mln in 1Q08, mainly corporate loans with only selective penetration of SME and the retail sector expected in 2008. The existing business plan expected four branches in 2008 and 16 branches by 2010.
Very positive
Analysts at Cheuvreux sum up by stating that the main reason why they liked the acquisition is due to the attractive acquisition price, young network with huge potential for expansion and efficiency gains, strong retail base with a loan to deposit ratio of 87%, synergies with BoC's existing corporate relations, diversification of BoC's revenue stream away from Greece and Cyprus in an even higher growth / margin region, and maintenance of a good capital position even post acquisition (Tier I will fall from 8.9% to 7.5%).
