Commerzbank has expanded its Central and Eastern
European franchise by buying a majority stake in Ukraine’s Bank
Forum. Assets in the country’s banking market have grown at an
average rate of more than 50 percent over the past five years,
driven by a fast-growing economy, said the German

Germany’s Commerzbank has acquired a majority interest of 60
percent plus one share in Bank Forum, Ukraine’s tenth-largest bank
by assets, for €435 million ($600 million), around 3.9 times book
value. The transaction was announced as Commerzbank reported a 54
percent rise in operating profit to €1.08 billion in the second
quarter of the year.

The Bank Forum deal will be funded by existing financial resources,
Commerzbank said. The bank has the option to buy another 25 percent
of the bank from majority investor Leonid Yurushev after 36

Commerzbank’s managing director, Martin Blessing, said: “After an
extensive search we have found an ideal complement for our network
of operational outlets in the booming region of Central and Eastern

Commerzbank is fast-developing a sizable Central and Eastern
European banking franchise – it also has a presence in the Russian,
Hungarian, Slovakian and Czech Republic markets.

Bank Forum was founded in 1994 and now has a market share of 2.3
percent and assets of €1.4 billion, two-thirds of which come from
SME customers. The Kiev-based company serves 230,000 retail
customers in Ukraine and has 3,100 employees in 230 branches.
Commerzbank has said it will look to double branch numbers to 400
over the next four years and to double its retail banking market

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Assets in the Ukrainian banking market have grown at an average
rate of more than 50 percent over the past five years, driven by a
fast-growing economy, said the German group. However, market
penetration of banking services is still comparatively low, leading
to significant growth potential.

With a 26 percent market share, Commerzbank has the leading
position in the settlement of German-Ukrainian foreign trade

Moreover, with the acquisition of Bank Forum, it will become the
first German bank to have an operational presence in the Eastern
European country.

Investment bank Keefe, Bruyette & Woods (KBW) reported that, in
its view, the 3.9 times book value is within the range paid by
Commerzbank’s peers in other recent Ukrainian deals (Raiffeisen
International’s purchase of Bank Aval at 3.5 times, for instance,
and Banca Intesa’s acquisition of Ukrsotsbank at 4.5 times).

But KBW also warned that Bank Forum’s profit has been “negligible”
(3 percent ROE in the first half of 2007) as it invests in growth,
and is likely to remain so for the foreseeable future as
Commerzbank aims to double market share in the mid term;
Commerzbank itself has indicated a slight negative impact on
pre-tax profits for 2008-2010.

“While the merits of the deal are debatable, [the acquisition] is
too small to move the needle of either the income statement or
balance sheet in our view and, importantly, still leaves plenty of
scope for further redeployment of capital,” said KBW.

Best results in Commerzbank’s history

The bank’s results for the first half of 2007 were
the best in its history. Operating profit rose by almost one-fifth
to €1.98 billion and its consolidated surplus grew by one-third to
€1.38 billion. After-tax ROE of 22.1 percent was the highest ever
within a half year period, while its cost-income ratio dropped to
53.9 percent.

Significantly, the bank has increased its number of retail
customers by 230,000 since October 2006. The interim results were
driven overall by strong organic growth, supported by the Germany
economy and by favourable overall economic conditions.

“Almost all business lines contributed to the rise in profits,”
said Klaus-Peter Müller, chairman of the board at Commerzbank, in a
statement. “This proves that we continue to meet our combined
objectives of keeping costs under control, whilst pursuing our
organic growth programmes.”

“With the implementation of growth programmes in our operating
business lines, we aim to increase market share in our buoyant
domestic market, as well as seizing significant opportunities in
selected growth markets,” added Müller, saying that he also expects
full-year results to beat expectations of a target return of 12

The Ukrainian transaction should help Commerzbank to continue
performing strongly as it strengthens the bank’s position in
Central and Eastern Europe, its core target growth region.

Overall, in summing up Commerzbank’s general business potential,
KBW said: “We continue to view [Commerzbank] as very cheap given
its solid profitability and surplus capital, and we reiterate our
Outperform recommendation.”


Speculation mounts in Germany over regional

Leading German banking figures are calling for consolidation among
their country’s banks following the US subprime housing market
crisis, which has embroiled some German banks and raised the chance
of banking takeovers from abroad. Two groups, regional bank
SachsenLB and IKB Deutsche Industriebank, which specialises in
lending to small businesses, have been heavily exposed to
defaulting US high-risk home loan obligations and had to be bailed
out by other German banks.

Analysts at private bank Sal. Oppenheim suggested the divestment of
IKB may provide foreign players with one of the few opportunities
left to enter the German market. Commerzbank has indicated that it
may bid for IKB, describing the ailing bank as a “good fit”. The
crisis has highlighted the weakened state of much of German
banking, sparking new demands for rapid rationalisation of the more
than 2,000 banks operating in the country.

Significantly, consolidation is getting governmental support.
German finance minister Peer Steinbrueck has said the regional
state banks, the Landesbanken, must use the opportunity to
combine their strengths. Germany, as a leading world economy, needs
more than just one or two national banking champions, he

Deutsche Bank chairman Josef Ackermann has joined in calls for the
initiation of mergers. The many small banks should “join forces,
one way or another”, he declared.

Publicly owned regional banks have already begun to merge, with
Stuttgart-based Landesbank Baden-Württemberg (LBBW) buying
SachsenLB to prevent the Leipzig-based lender from collapsing. LBBW
will inject immediately €250 million to prop up SachsenLB and is
expected to pay its owners, the German state of Saxony and its
regional savings banks, at least €300 million in cash and shares.
The takeover will cement LBBW’s position as Germany’s biggest
Landesbank, ahead of its southern rival BayernLB.

Heinrich Haasis, president of the German savings banks’ federation,
the DSGV, favours alliances between the publicly owned banks
represented by his group and regional banks, while he opposes
take-overs by private lenders such as Deutsche Bank. In particular,
Haasis called for a tie-up between regional giant LBBW and WestLB,
which has been weakened by a financial scandal unrelated to the
subprime crisis. US investment fund JC Flowers is reported to be
negotiating a 38 percent stake in WestLB, a transaction that Haasis

On 24 September, the Financial Times newspaper reported
that the state owners of Germany’s two biggest public sector banks
have started talks that could eventually lead to the creation of
the country’s second-biggest bank after Deutsche Bank. A merger
between Landesbank Baden-Württemberg and BayernLB would create a
national champion with assets of more than €900 billion.

Apart from domestic pressures for mergers, the European Commission
is expected to intervene to press for more changes. The EU
intervened in 2005, forcing the Landesbanken to give up
their sovereign lending status and repay some €4 billion in capital
regarded as state aid. However, these banks still retain extensive
and historic low-cost funding in their balance sheets.