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Sharing deal insightEuropean Financial Services M&A news and views

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2 PwC Sharing deal insight

Contents

03 Welcome

04 Data Analysis

08 Developing a successfulMiddle Eastern strategy

12 Buying into Turkey’ssustained growth

16 Looking Ahead

€16.8 billionof financial services deals in the third quarter,up more than 50% on the previous threemonths

€2.3 billiontakeover of RBS Global Merchant Serviceshighlights renewed interest fromprivate equity

Acquisition values rose sharply in thethird quarter of 2010 as the impetus forM&A continues to accelerate. Whilerestructuring is still a strong theme, theupsurge in cross-border deals confirmsthat growth is firmly back on the agenda.More than half of the value and six of theten biggest deals in the quarter involvedforeign buyers (see ‘Data Analysis’).

For international groups looking todevelop and strengthen their presence infast-growth emerging markets, it wouldbe difficult to ignore the Middle East,one of the world’s richest and mosteconomically critical regions. The region’sbanking sector has weathered thefinancial storm and is set for renewedgrowth. Islamic finance is showingparticularly strong resurgence and futurepotential. However, with a fresh round ofconsolidation on the cards and valuationsset to rise, it will be important to act soonor face higher entry costs in the future(see ‘Developing a successful MiddleEastern strategy’).

Another key focus for growth is Turkey,a rapidly expanding but still under-penetrated banking market. The Turkishbanking sector underlined its investmentpotential by sustaining profitability andgrowth throughout the global financial

crisis. Turkey’s relatively young andexpanding population will help todrive economic growth and increasingdemand for credit in the years to come(see ‘Buying into Turkey’s sustainedgrowth’).

The M&A market looks set to maintain itsmomentum over the coming quarter.Private equity will continue to play aninfluential role in driving deal activity.In turn, restructuring and resultingdivestment will continue to openup targets for acquisitive expansion.The impetus for restructuring is likely tobe especially strong within insurance,as Solvency II spurs companies to reviewtheir product set, capital efficiencyand underlying strategic priorities(see ‘Looking Ahead’).

We hope that you find this edition ofSharing deal insight interesting. Please donot hesitate to contact either of us or anyof the article authors if you have anycomments or questions.

Welcometo the new format of our quarterlyreport into M&A in the Europeanfinancial services sector.

Nick PagePwC (UK)[email protected]

Fredrik JohanssonPwC (UK)[email protected]

Formerly known as European Financial Services M&A Insight, Sharing deal insight provides perspectives on therecent trends and future developments in the M&A market, including analysis of the latest transactions andinsights into emerging investment opportunities.

PwC Sharing deal insight 3

The overall value of European financialservices M&A included in our datasetgrew to €16.8bn during the third quarterof 2010.1 This represents an increase of54% from the previous quarter’s figure of€10.9bn and an improvement of 87% onthe €9bn recorded during the comparablequarter of 2009 (see Figure 1).

The growth in deal values was driven byan increase in activity involving bankingtargets, which moved up to €13.2bn from€6bn in the second quarter of the year(see Figure 2). In contrast, deal activity

among asset managers remained stableand insurance transactions wereunusually modest, with the two sectorsrecording deals worth €1.1bn and €1.3bnrespectively.

The data was dominated by the fourlargest deals announced during thequarter (see Figure 1). All four werevalued between €2bn and €4bn, all fourinvolved banking targets and in two casesSantander was the buyer.

Data Analysis

European financial services M&A transactions experienced a notable acceleration during the third quarter of theyear, driven by a number of significant banking transactions. Although restructuring remains a key driver of dealactivity, bidders are becoming more growth-oriented.

1 The source data for the deals analysed in thispublication come from mergermarket, Reutersand Dealogic, unless otherwise specified. Ouranalysis methodology is summarised on P17.

Figure 1: Quarterly European FS deals by value (€m)

Source: mergermarket, Reuters, Dealogic and PwC analysis

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

Q4 09 Q1 10 Q2 10 Q3 10

1. Deutsche Postbank AG €3.9bn2. Bank Zachodni WBK SA €3.1bn3. RBS Global Merchant Services €2.3bn4. RBS: 318 UK branches €2bn

1. AXA SA €3.3bn2. KBL European Private

Bankers S.A €1.3bn1. BNP Paribas Lux €1.3bn2. RBS Sempra €1.2bn

1. WestLB €3bn2. Intesa Sanpaolo Servizi €1.8bn3. Delta Lloyd Groep €1.14. JPMorgan Cazenove €1.1bn



• Deutsche Bank announced its intentionto acquire the 70% of DeutschePostbank it does not already own for aprovisional consideration of €3.9bn, tobe funded by its recent rights issue;2

• Santander agreed to acquire Allied IrishBank’s 70% holding in Bank ZachodniWBK of Poland (and its 50% stake inBZ WBK Asset Management) for a totalconsideration of €3.1bn;

• Royal Bank of Scotland sold its GlobalMerchant Services business to twoUS private equity firms – AdventInternational and Bain Capital – for€2.3bn; and

• Santander agreed to purchase 318 ofRoyal Bank of Scotland’s UK branches,along with their associated assets andliabilities, for €2bn.

The quarter’s four largest deals highlightthe continuing role of bankingrestructuring in European financialservices M&A. Both of the sales by RoyalBank of Scotland were requirements ofEU state aid conditions, and AIB’sdecision to sell its stake in Zachodni wasdriven by a need to raise capital. Bothbanks made other, smaller disposalsduring the quarter, and they were notalone. KBC and companies of the formerFortis group both made a number ofdivestments during the period. Theannouncement since the end of thequarter that Banco Bilbao VizcayaArgentaria (BBVA) has acquired a24.9% stake in Garanti Bank of Turkey3

underlines the ongoing importance ofrestructuring as a driver of deal activity.

Even so, the fact that three of thequarter’s four largest deals involved cross-border bidders also suggests that – aspredicted in the last edition of Insight –buyers are becoming more focused ongrowth. Nor was cross-border activitylimited to the top end of the market.Our dataset includes more than €2bn ofcross-border mid-market and smallerdeals announced during the quarter.The net effect is that the overall value ofcross-border transactions exceededdomestic deals by an appreciable margin,making up 57% of all deal value duringthe quarter compared to an average of41% for the first two quarters of the year(see Figure 3).

Figure 2: Quarterly European FS deals by value – subsector analysis (€m)

n Asset Management n Banking n Insurance n Other


14,000

12,000

10,000

8,000

6,000

4,000

2,000

0Q3 10Q3 09 Q4 09 Q1 10 Q2 10

Figure 3: Quarterly European FS deals by value – domestic v. cross-border (€m)

n Domestic n Cross-border


12,000

10,000

8,000

6,000

4,000

2,000

0Q1 2010 Q2 2010 Q3 2010

2 ‘Deutsche Bank completes rights issue’,Financial Times, 06.10.10.

3 BBVA media release, 02.11.10.

The quarter’s four largest deals highlight the continuing role ofbanking restructuring in European financial services M&A. Both of thesales by Royal Bank of Scotland were requirements of EU state aidconditions, and AIB’s decision to sell its stake in Zachodni was drivenby a need to raise capital.


The involvement of two private equitybuyers in Royal Bank of Scotland’s €2.3bnsale of its Global Merchant Services unitwas also significant. This was by far thelargest private equity direct transaction inEuropean financial services recordedsince before the financial crisis, and therewere also a number of private equity-backed transactions in the mid-market.In total, private equity-related dealsannounced during the quarter werevalued at €3.3bn, or 20% of the total.This appears to validate the impressionthat private equity firms drawing downon their committed funds are playing anincreasingly influential role in Europeanfinancial services M&A.

Turning to the rest of the quarter’s largestdeals (see Figure 4), several transactionsreinforce the impression of more cross-border and growth-focused deal making,as well as growing private equity activity:

• Santander’s branch networkacquisitions in the UK and Germany(for €1,992m and €555m respectively)

were consistent with the diversifiedgrowth rationale behind the BankZachodni deal. The UK deal gives thebank instant scale in the lucrativeSME market, where Santander hopesto emulate the earnings growth ithas achieved in UK retail banking.Santander has also identified Germanyas a core market and will use the SEBdeal to build on its existing consumerfinance business.

• The acquisition of RBS Global MerchantServices was not the only significantprivate equity deal of the quarter.Lloyds Banking Group sold a 70% stakein Bank of Scotland Integrated Finance,the former HBOS venture capitalbusiness, to secondary specialist CollerCapital for €400m. Doughty Hanson’s€350m acquisition of the trust andadministration service provider EquityTrust was a reminder of the attractionsof highly visible cash flows and lowcapital requirements. Doughty Hansonplans to merge Equity Trust with TMFGroup, another portfolio business.

Figure 4: Top 10 Deals Q3 2010

Month Target company Target country Acquirer company Acquirer country Deal Value (€m)

Sep Deutsche Postbank (70%) Germany Deutsche Bank AG Germany 3,882

Sep Bank Zachodni WBK (70%) Poland Banco Santander SA Spain 3,088

Aug RBS Global Merchant Services UK Advent International Corp; USA 2,290Bain Capital Inc

Aug Royal Bank of Scotland - UK Banco Santander SA Spain 1,992318 UK branches

Sep FIH Erhvervsbank A/S Denmark ATP; PFA Pension; Denmark 671Folksamgruppen; CP Dyvig &Co A/S

Jul SEB AG - German retail banking Germany Banco Santander SA Spain 555operations

Jul Bank of Scotland UK Cavendish Square Partners LP - UK 400Integrated Finance 70% owned by Coller Capital

Aug DataCash Group plc UK MasterCard Inc USA 383

Sep Equity Trust Holdings SARL Netherlands Doughty Hanson & Co Netherlands 350

Jul Secura NV Belgium QBE Insurance Group Ltd Australia 267

Sub-total 13,878

Other 2,947

Grand total 16,825


The involvement of two private equitybuyers in Royal Bank of Scotland’s €2.3bnsale of its Global Merchant Services unitwas also significant.


• Although very different transactions,MasterCard’s purchase of UK electronicpayments specialist DataCash (for€350m) and QBE Insurance’sacquisition of Secura NV from KBC (for€267m) both exemplified the search fordiversified growth. The first deal isintended to provide long-term growthby leveraging DataCash’s products andservices across MasterCard’s globalnetwork. The second gives QBE, whichhas an M&A-driven growth strategy andhas made more than 40 acquisitionssince 2005, greater scale in theEuropean reinsurance market.

In addition to the quarter’s largesttransactions our dataset records over 250other financial services deals, althoughmost have no verifiable value. Threefeatures of this activity – each of whichwas predicted in the last edition ofInsight – caught our eye:

• Rapid consolidation among Spanishsavings banks. Spanish savings bankshave been merging fast, with thenumber of Cajas falling from more than40 to fewer than 20 in the space of afew months.4 In addition to a number ofbilateral mergers, two transactions tookplace which saw several Cajas joiningtogether in contractual groups knownas SIPs. These were not conventionalmergers, and no deal values weredisclosed. However, data released byCECA, the Caja association, on thecapital positions of the Cajas involvedas at 30 June 2010 suggests that both ofthe new groups have several billionEuros of capital.

• Deal activity involving targets inSouth Eastern Europe, especiallyTurkey (see ‘Buying into Turkey'ssustained growth’). Among the mostnotable were Vienna Insurance Group’s€126m acquisition of TBIH,a Dutch business with insuranceoperations in Turkey, the Ukraine andGeorgia; Milli Reasurans’ purchase ofa 36% stake in Anadolu Sigorta, a localinsurance rival (also for €126m); andthe sale of Fortis’ former Turkish

banking operations to Türk EkonomiBankasi (TEB), the local bank 50%owned by BNP Paribas, for anundisclosed amount. Theannouncement of BBVA’s acquisitionof a stake in Garanti Bank5 is a furtherreminder of the attractions of theTurkish banking sector to foreignbidders.

• Consolidation among UK insurancebrokers and investment advisers.These transactions were either verysmall or without disclosed deal values,but the fact that seventeen such dealswere announced during the quartersuggests that small brokers and adviserscould be moving to boost their scalein anticipation of the FSA’s RetailDistribution Review, due to come intoforce at the end of 2012.

In each case it will be interesting to seewhether these develop into sustainedtrends, or whether they prove to beshort-term features of the financialservices deal market.

4 ‘Banks and cajas not yet out of the woods’,Financial Times, 05.10.10.


57%of deals were cross-borderacquisitions

For international groups looking todevelop and strengthen their presence infast-growth emerging markets, it wouldbe difficult to ignore one of the world’srichest and most economically criticalregions.

The banking sector in the Middle East hasdoubled in size since 2005 (total assetsstood at more than a trillion dollars at theend of 2009).6 Loan markets expandedrapidly in the years leading up to the

financial crisis (more than 40% in theUAE and 30% in Saudi Arabia in 2008).7

Confidence was subsequently affected bysome high-profile local defaults and thedifficulties faced by Dubai World, agovernment of Dubai investment fund.However, the banking sectors in mostGulf Co-operation Council (GCC) stateswere able to sustain profitability, growthand strong capital adequacy ratios in2008 and 2009 (see Figure 1).

Developing a successfulMiddle Eastern strategy

Graham HaywardPwC (Bahrain)[email protected]

Jamal DarPwC (Bahrain)[email protected]

With the Middle East moving back to higher growth levels and the penetration of banking services still low incomparison to the size of the region’s economy, interest from international investors is increasing. How canpotential investors make the most of the Middle East’s vast potential?

6 Entering the Gulf financial services market,published by PwC in 2007 and published financialstatements.

7 Impact of the financial crisis on the GCC, updatedby the IMF in June 2010.

Figure 1: Recent trends in GCC banking by country (US$m)

Country CAR1

2010 2009 2008 2009 2008 2009 2008

Bahrain 19.6% 99,831 109,014 -8.4% 178 -430 0.2% -0.4%

KSA 20.6% 348,705 336,841 3.5% 6,862 7,106 2.0% 2.1%

Kuwait 17.2% 149,203 150,025 -0.5% 1,305 1,183 0.9% 0.8%

Oman 15.5% 23,730 23,786 -0.2% 312 423 1.3% 1.8%

Qatar 16.1% 104,806 91,275 14.8% 2,567 2,574 2.4% 2.8%

UAE 20.3% 323,651 296,921 9.0% 3,990 5,202 1.2% 1.8%

1 Regulatory capital to risk-weighted assets (figures for all banks in the country)

2 Based on figures for 50 largest banks by assets in the GCC

Source: Source: Published financial statements and IMF

Return on assets2Profit2Assets2 Growth2


The banking sector in the Middle East hasdoubled in size since 2005 (total assets stoodat more than a trillion dollars at the endof 2009).


The region’s top ten banks have alsocontinued to deliver strong returns (seeFigure 2), with many using the downturnas an opportunity to review and modifylending policies.

Standard Chartered has provided a strongvote of confidence by announcing that itintends to ‘step up its focus on the MiddleEast’.8 The bank is reported to be aimingto double its revenues from the region to$4 billion over the next three to five yearsthrough a combination of organic growthand acquisition.9 Islamic finance is set toform a key part of Standard Chartered’sgrowth plans. HSBC, the region’s largestinternational bank, has also been seekingto strengthen its presence, with anincreasing focus on the mass affluentmarket.

Future prospectsThe prospects for international groupshave been bolstered by the swift reboundin the economy of the Middle East, whichis set to grow by more than 4% a year overthe next three years.10 Oil prices arepushing past $80 per barrel once again,which is above the oil price projectionsused to set many government budgets inthe region.11 Steps to diversify outputbeyond oil and gas also appear to bepaying off. It is notable that non-oil GDPgrew by 5% in 2009.12

In a more risk averse and financiallyconstrained environment it may be sometime before we see a return to the loanmarket expansion seen prior to the crisis.However, credit growth rates have begunto rise once again in a number ofcountries including Saudi Arabia.13 In thelong term, the generally low loan

penetration rates across the region offersignificant opportunities for furthergrowth. In particular, the loan to GDPratios in Saudi Arabia and UAE, theregion’s two largest economies,14 arerunning at around 40%15 and 75%16

respectively, compared to more than100% in many mature markets.

While project finance and other supportfor real estate and infrastructuredevelopment will continue to be a crucialsource of revenue, there are signs thatboth local and international institutionsare keen to diversify and build up theirconsumer, SME and wealth managementbusinesses. As they look to put their loanportfolios onto a more controlled andsustainable basis in the wake of recentcredit losses, many banks are movingaway from ‘name’ lending towards creditdecisions based on more establishedcredit risk analysis.

The region’s favourable demography is setto provide a strong spur for long-termgrowth in credit cards, vehicle loans andother forms of consumer finance – it isestimated that around 65% of thepopulation is under 30.17 The mortgagemarket is also opening up in a number ofstates. The planned new Saudi MortgageLaw could provide the catalyst forexpansion in the country and a possiblemodel for other GCC states, though thereis as yet no firm timetable for enactment.

Figure 2: Top ten banks in the Middle East as of 31.12.09 (US$m)

Return on equity

2009 2008 2009 2008 2009 2008

1 Emirates UAE 76,724 76,992 -0.3% 911 1,004 10.5% 14.3%NBD

2 National KSA 68,811 59,147 16.3% 1,080 562 13.8% 7.7%CommercialBank

3 National UAE 53,636 44,888 19.5% 823 823 14.8% 21.0%Bank ofAbu Dhabi

4 SAMBA KSA 49,595 47,704 4.0% 1,217 1,188 20.2% 22.2%

5 Qatar Qatar 49,199 41,739 17.9% 1,149 1,003 21.0% 21.9%National Bank

6 Riyad Bank KSA 47,157 42,574 10.8% 810 704 10.7% 10.3%

7 Al Rajhi KSA 45,641 43,981 3.8% 1,809 1,740 23.5% 24.1%Banking andInvestmentCorporation

8 National Kuwait 44,716 43,389 3.1% 924 933 14.5% 16.4%Bank ofKuwait

9 Abu Dhabi UAE 43,618 40,220 8.4% (140) 370 -2.7% 8.5%CommercialBank

10 Kuwait Kuwait 39,354 37,391 5.3% 250 619 4.6% 11.0%FinanceHouse

Source: Published financial statements

8 Standard Chartered media release, 02.07.10.

9 Dow Jones Newswires, 06.06.10 and‘Keeping faith’, The Banker, 01.08.10.

10 World Bank Global Economic Prospects: MENAregion review, Summer 2010.

11 ‘GCC’s 2010 fiscal position strong on oil prices’,Emirates 24-7, 11.05.10.

12 The financial crisis, recovery and long-termgrowth in the Middle East and North Africa,published by the World Bank in May 2010.

13 Impact of the financial crisis on the GCC, updatedby the IMF in June 2010.

14 Economist Intelligence Unit, August 2010.

15 Saudi Arabian Monetary Agency August 2010.

16 Central Bank of UAE, September 2010.

17 Presentation by the Middle East Youth Initiative,22.05.10.

Assets Growth Profit

One of the most important targets forgrowth is Islamic finance. The GCC is theworld’s largest market for Sharia-compliant products, accounting for morethan 40% of the total assets of Islamicfinancial institutions.18 Islamic bankingmakes up 17% of banking assets in theGCC and is expected to grow at between15-20% a year.19 Key developmentsinclude the renewed interest in Islamicbond (Sukuk) issues, which havingdipped below $100 million in the firstquarter of 2009, have exceeded $3 billionin three of the past five quarters (seeFigure 3). HSBC is the leadingunderwriter of Islamic bonds in the GCC,with volumes topping $1 billion in thefirst half of 2010. Deutsche Bank is alsostrongly positioned in third place.20

Realising the potentialFor banks looking to follow a universalmodel, no Middle East strategy is likely tobe viable in the long term without apresence in Saudi Arabia. The kingdom isnot only the region’s leading economy,but also has the largest population in theGCC (27 million).21 The fact that four ofthe region’s largest banks are based inSaudi Arabia attests to its status.

As a member of the G20, Saudi Arabia hasgiven strong backing to the proposals forenhanced transparency and macro-prudential supervision set out by theFinancial Stability Board on behalf of theG20. These reforms will help tostrengthen stability, integrate SaudiArabia more closely into the globalfinancial system and facilitate furtherdevelopment of the market.

A number of international groups alreadyhave well-established operations in Saudi

Arabia, including HSBC through itsassociate SABB (formerly the SaudiBritish Bank), in which HSBC has a 40%stake.22 RBS also has a strong presencethrough its 40% holding in SaudiHollandi,23 though RBS may beconsidering a sale of its stake according topress reports.24 A number of groups havealso acquired banking licences in recentyears including Deutsche Bank, JPMorgan and BNP Paribas.25 However, itwould appear that the authorities arenow keen to curtail the issue of licences,for the time being at least, and thereforeacquisition is the only real option forentry in the short term. The number ofavailable targets is limited and controlpremiums are therefore likely to be high.

Bahrain is the region’s traditionalfinancial services hub and has longwelcomed investment from the state’sneighbours and foreign banks. In turn,the Dubai International Financial Centrecontinues to provide an important focusfor wholesale banking and insurance,

though not retail banking. Qatar has alarge banking sector in comparison to itspopulation (less than one million),reflecting its importance as a focus forsovereign wealth funds. The bankingsector in Kuwait is less open than otherGCC states. Foreign banks are restrictedto one branch and cannot compete in theretail market.26

While most international attention hastended to focus on the oil rich Gulf, somegroups are now looking further afield.Lebanon has one of the region’s fastestexpanding banking sectors and aneconomy that is expected to grow by 6%this year.27 It is notable that this year’slargest financial services deal in theMiddle East was the acquisition of CreditLibanais, a leading Lebanese bank28

(Figure 4 outlines the five most valuabledeals). Other potential opportunitiesinclude Libya, which is increasingly keento attract foreign investment into itsbanking sector.

Even where licences are available, gaininga significant presence in the face ofentrenched competition from local andexisting international players may bedifficult. Some institutions may thereforelook to acquisition as a faster way toestablish a significant presence. The M&Amarket is set to become more active asgovernments seek to encourageconsolidation within what are often

Figure 3: Sukuk issues in the Middle East and North Africa

Source: Zawya

3Q09 4Q09 1Q10 2Q10 3Q100

1,500

3,000

4,500

As a member of the G20, Saudi Arabia hasgiven strong backing to the proposals forenhanced transparency and macro-prudentialsupervision10 PwC Sharing deal insight

($m

)


fragmented local banking sectors. In turn,the financial services sector in the regionas a whole is becoming more competitiveand sophisticated, with the resultingrise in quality likely to affect valuations.Timing is therefore critical forinternational groups eyeing upopportunities in the GCC and widerMiddle East. Delays could make marketentry more expensive and challenging.

There may also be openings for jointventures in niche areas such asmortgages, credit cards, wealthmanagement and bancassurance.Examples include Standard CharteredSaadiq’s partnership with Salama IslamicArab Insurance, which has enabledStandard Chartered to expand its rangeof Sharia-compliant savings and wealthmanagement plans.29

Seizing the prizeThe economic fundamentals of theMiddle East continue to be sound,with oil and gas being supplemented byincreasing commercial diversification.The banking sector has weathered thefinancial storm and is set for renewedgrowth. Islamic finance is showingparticularly strong resurgence andfuture potential. Whether looking tobuild, buy or establish a joint venture,local knowledge and the ability to formstrong relationships are critical to entryand development. Governments,regulators and customers will also favourinvestors that can demonstrate a long-term commitment to the region.

Figure 4: Top five financial services deals in the Middle East in 2010

Month Target company Target country Acquirer company Acquirer country Value (€m)

Aug Credit Libanais (65%) Lebanon EFG Hermes Egypt 425

Jul Burgan Bank (20%) Kuwait United Gulf Bank Bahrain 266

Sep Gulf Insurance Co (39%) Kuwait Fairfax Financial Canada 160

Jul Arabeya Online (90%) Egypt Bank Audi Lebanon 36

Apr Kuwait Clearing Co Kuwait International Kuwait 28Financial Advisors

Source: Dealogic and Reuters

18 HSBC Amanah media release, 05.11.09.

19 Middle East Company News, 26.09.10.

20 Islamic Capital Markets League Tables First HalfYear 2010, published by Bloomberg.

21 Economist Intelligence Unit, August 2010.

22 SABB website, 15.10.10.

23 Saudi Hollandi website, 15.10.10.

24 ‘RBS eyes Saudi Hollandi stake sale’, 18.05.10.

25 Economist Intelligence Unit, 04.06.10.

26 2010 Investment Climate Statement – Kuwait,published by the US Department of State,March 2010.

27 IMF World Economic Outlook, April 2010.

28 EFG Hermes media release, 17.08.10.

29 Standard Chartered media release, 05.05.09.

Editorial eyeThe Middle East banking sectoroffers significant potential forinvestment and growth. However,with a fresh round of consolidationon the cards and valuations set torise, it will be important to actsoon or face higher entry costs inthe future.

40%of the total assets of Islamicfinancial institutions arelocated in the GCC andIslamic banking is expectedto expand by 15-20% a year

‘Turkey is a market that offers greatpotential. Turkey has a rapidly growingeconomy with attractive demographics,’said Wilfred Nagel, CEO of ING BankTurkey, in a trading statement earlier inthe year. ‘The banking industry in Turkeyis still relatively small compared to thecountry’s GDP and therefore offers theprospect of stronger growth compared tomany European countries.’30

ING is Turkey’s tenth largest bank, havingacquired Oyak Bank in 200730 (see Figure1). Other foreign banks with 100% ormajority holdings in the Turkish top teninclude Dexia (Denizbank) and NationalBank of Greece (Finansbank). Citibank(Akbank), BBVA (Garanti) and Unicredit(Yapi ve Kredi as part of a joint venturewith the Koç Group) also have significantminority stakes (see Figure 1).

Buying into Turkey’ssustained growth

Serkan TarmurPwC (Turkey)[email protected]

Sencer TuruncPwC (Turkey)[email protected]

The Turkish banking sector underlined its investment potential bysustaining profitability and growth throughout the global financial crisis.How can international banks buy into this expanding but still under-penetrated market?

Figure 1: Turkey’s top ten banks (as of 30.06.10)

Bank Total assets Total liabilities Total deposits Total equity Net profit/loss** Ownership Foreign(€m) (€m) (€m) (€m) (€m) stake

Türkiye Cumhuriyeti Ziraat Bankası A.Ş. 69,141 63,332 55,530 5,809 947 State 0%

Türkiye İş Bankası A.Ş. 73,044 64,639 41,706 8,404 870 Private 0%

Türkiye Garanti Bankası A.Ş. 61,820 53,991 37,851 7,830 1,019 Private 24.9%

Akbank T.A.Ş. 58,799 50,696 36,700 8,103 896 Private 20%

Türkiye Vakıflar Bankası T.A.O. 38,189 34,107 25,883 4,081 251 State 0%

Yapı ve Kredi Bankası A.Ş.* 42,852 37,876 25,476 4,976 581 Private 0%

Türkiye Halk Bankası A.Ş. 35,479 32,133 26,610 3,346 511 State 0%

Finans Bank A.Ş. 17,226 15,051 10,550 2,175 168 Private 100%

Denizbank A.Ş. 15,043 13,341 8,817 1,702 162 Private 100%

ING Bank A.Ş. 8,573 7,515 4,911 1,057 50 Private 100%

Others 52,654 38,063 19,720 14,591 578

Total 472,819 410,744 293,754 62,075 6,032


* 80% shares of Yapı ve Kredi belong to 50% foreign-owned Koç Finansal Hizmetler A.Ş. ** Figures for the first six months of the year.

Source: Banks Association of Turkey


In 2001, a combination of mountingportfolio losses and sudden currencydevaluation led to a collapse in liquidityand confidence in the Turkish bankingsector. The subsequent restructuring ofthe sector included consolidation (thenumber of banks has more than halvedsince 200131), an overhaul of supervisionand tighter lending, transparency andcapital adequacy rules.

The restructuring and reforms laid thefoundations for strong recovery andgrowth throughout the last decade(see Figure 2). It also enabled Turkey’sbanks to avoid the credit bubbles anddestabilising exposure to toxic assets seenin other parts of Europe. While the levelof impaired loans increased32 and theeconomy went into recession in 2009,the Turkish banking sector continued toexpand and no institutions needed tobe rescued by the government. Capitaladequacy ratios also remained stable ataround 20% (see Figure 3).

Future prospectsThe prospects for the future are evenstronger. Turkey is a member of the G20.It is also one of the E7 group of leadingemerging economies, whose GDP is setto outstrip the G7 by 2050.33 Havingdipped in 2009, the Turkish economyhas bounced back into growth in 2010and is expected to expand by an averageof around 4.5% a year over the nextdecade.34 Its relatively young andexpanding population (Turkey is set to bethe second most populous country inEurope after Russia by 203035) will helpto sustain growth in output and demandfor credit.

High spreads have helped to sustainattractive returns within the bankingsector (see Figure 4). Yet loan penetrationis still low in comparison to other Centraland Eastern European (CEE) states (seeFigure 5), indicating the potential forfurther growth. By 2050, our ownanalysis suggests that the asset size of theTurkish banking sector will be on a parwith Italy or Spain.36

One specific growth area is projectfinance in areas such as energy. Turkeyis becoming a crucial hub in oil and gastransportation from Russia and theMiddle East to Western Europe. Thecountry is also undergoing a majorexpansion of roads, schools and hospitals.On the retail side, legislation passedin 2007 has paved the way for theintroduction of long-term mortgages andthe market is set for rapid expansion.Other relatively under-developed areasinclude asset management.

Figure 2: Total assets, equity and net profits of Turkish banks

n Total assets n Total equity –– Total profit*

*Profit in 2010 for first six months of the year.

Source: Banking Regulation and Supervision Agency of Turkey (BRSA)

500

350

400

450

300

200

150

100

50

02006 2007 2008 2009 6M102002 2003 2004 2005

Figure 3: Capital adequacy ratios

n Total assets –– Capital adequacy ratios (CAR)*

*Ratio of bank capital to risk-weighted assets


500 25%

20%

15%

10%

5%

0%

10

7

8

9

5

6

4

3

2

1

0

350

400

450

300

200

150

100

50

02009 6M102005 2006 2007 2008

30 ING Bank Turkey media release, 30.08.10.

31 Banks Association of Turkey website, 14.10.10.

32 BRSA website, 21.10.10.

33 The World in 2050, published by PwC inMarch 2006.

34 PwC Economics, October 2010.

35 Economist Intelligence Unit Ten-year growthoutlook, 09.09.10 and ‘Turkey’s economy surgedin quarter’, Wall Street Journal, 15.09.10.

36 Banking in 2050: How big will the emergingmarkets get, published by PwC in 2008.

By 2050, our own analysis suggests that theasset size of the Turkish banking sector will beon a par with Italy or Spain.

Tota

l eq

uity

& a

sset

s (€

bn)

Total profit (€b

n)

Tota

l Ass

ets

(€b

n)

CA

R


Further growth opportunities come fromIslamic finance. While still small (lessthan 5% of total bank assets in Turkey) incomparison to the Middle East (see‘Developing a successful Middle Easternstrategy’), Islamic banking has beengrowing at double the rate ofconventional business.37

An internationalinvestment opportunityTurkey has no restrictions on foreignownership in the banking sector and iskeen to attract international investment.A number of international banks have setup greenfield operations. However, theminimum paid up capital requirement is$300 million38 and can take at least sixmonths to secure. Newcomers also facethe challenge of breaking into a highlyconcentrated market, in which the topten banks control more than 80% ofassets and loans.39

Acquisition can offer a quicker way toestablish and develop a market presence.Having peaked in the lead up to theglobal financial crisis, price to bookvalue (P/BV) ratios have come down tothe levels seen in earlier parts of thedecade (see Figure 6). However, most ofthe larger banks are either state ownedor have significant foreign holdingsalready. One entry option may be seekingto buy the stake of an existing foreigninvestor. In November 2010, BBVAannounced the acquisition of a 24.9%stake in Garanti (18.6% from GEand 6.3% from the Dogus Group).40

Some of the smaller institutions maystill be available, though developing thefranchise and customer base willtake time.

Figure 4: Return on assets and equity

n ROA n ROE


25%

20%

15%

10%

5%

0%2005 2006 2007 2008

Figure 5: Loan penetration in CEE


10,500

7,000

3,500

00% 40% 80% 120%

37 ‘Islamic finance: Ambitious growth targets set by country’s ‘participation banks’’, Financial Times, 04.05.10.

38 BRSA statement, 30.06.10.

39 Banks Association of Turkey website, 14.10.10.


Bubbles represent relative total loan size

Total loan/GDP

LatviaCroatia

Hungary

Poland

Kazakhstan

UkraineBosnia

Czech Republic

Slovakia

Russia

Turkey

2009

Loan

per

cap

ita (€

)


Figure 6: Valuations of transactions in Turkish banking sector

Source: Bloomberg and mergermarket

6.0

5.0

4.0

3.0

2.0

1.0Nov05

Dec05

Apr06

May06

May06

Jun06

Sep06

Oct06

Jun07

Jul07

Jul07

Aug07

Sep08

Feb10

Having peaked in the lead up to the globalfinancial crisis, price to book value (P/BV)ratios have come down to the levels seen inearlier parts of the decade.

Editorial eyeAcquiring a position in thisrapidly growing G20 andE7 banking market is set tobe a key target for manyinternational groups. Yetwith many of the largerprivate banks already ininternational hands,prospective entrants mayneed to acquire existingforeign holdings or tap intonew growth areas suchas mortgages, assetmanagement and Islamicbanking.

P/B

V r

atio

s


In the last edition of Insight, wecommented on the disappointing level ofEuropean financial services M&A duringthe first half of 2010. Even so, we thenforecast a gradual increase in transactionsand predicted a return to growth-orienteddeal making, albeit in a different form tothe transactions of the boom years.

The third quarter of 2010 did indeed see aperceptible pick-up in growth-focusedfinancial services M&A activity (see ‘DataAnalysis’). It was particularly encouragingto observe that talk of restructuring –common currency in the financialmarkets during the past year – wasgaining traction.

As we look towards the end of 2010 andthe early part of 2011, we make somefurther cautious predictions about futuredevelopments in European financialservices M&A. In particular, we want tofocus on two areas – one where activity

has already accelerated, and one where ithas recently been relatively subdued.

The first area is private equity-relatedactivity. The build up of private equitydeals has been widely discussed in thefinancial press, and our analysis bears outthe impression that firms are committingfunds to financial services investments(see ‘Data Analysis’). Combined with theoverall reduction in M&A since the middleof the last decade, this expansion meansthat in the third quarter of 2010 theprivate equity industry accounted for anexceptionally large proportion of thefinancial services deals in our dataset.

We also note that the range oftransactions attracting private equityfunds is broadening, and we expect this tocontinue. The third quarter has seendirect bids for financial targets, supportfor management buyouts, secondarybuyouts and the acquisition of loanportfolios.

We feel that buyout firms will continue toplay an increasingly important role inEuropean financial services M&A. Thisdoes not mean that every quarter will seelarge private equity deals, but we thinkthat the influence of the sector willcontinue to grow, contributing to achanging European M&A landscape.

The second area is insurance-related dealactivity, which has been relatively modestin recent quarters. Some large deals havetaken place, but pan-Europeanconsolidation has yet to materialise and

the majority of recent transactions havebeen confined to the mid-market.

Still, we feel that the European insuranceindustry retains considerable scope forrestructuring. The incoming Solvency IIregime will encourage firms to maximisetheir capital efficiency and rethink theirstrategic options. Banking groups willalso continue to review their ownership ofinsurance subsidiaries, particularly nowthat Basel III promises to tighten capitalrequirements for bancassurers.

Several European insurance groups havealready taken steps to reduce theirexposure to mature markets, shedsub-scale businesses and build up theiroperations in faster growing regions.Groups pursuing disposals include Aegonand Old Mutual, and rumours of large,scale-building transactions circulate inthe markets on a regular basis.

In the UK, the consolidation vehicleResolution has been an active acquirer,though it remains to be seen whether itsmodel will be imitated elsewhere inEurope. The London insurance market isalso a perennial source of M&A rumours,as illustrated by Apollo’s recent bids forBrit Insurance.

All in all, we think it is only a matter oftime before we see more widespreadchanges in the ownership of Europeaninsurance assets.

Looking Ahead

European financial services M&A picked up strongly during the third quarter of 2010. We expect a number ofdrivers, some discussed in this paper, to continue to influence deal activity. Two of these drivers are increasingprivate equity involvement and further restructuring in the European insurance industry.

All in all, we think it is only a matter of timebefore we see more widespread changes in theownership of European insurance assets.

The ‘Data Analysis’ and ‘Looking Ahead’sections in this issue include financialservices deals:

• Reported by mergermarket,Thomson and Dealogic;

• Announced during the third quarterof 2010, and expected to complete;

• Involving the acquisition of a >30%stake (or significant stake givingeffective control to the acquirer);

• Acquisitions of Europe-based financialservices targets where a deal value hasbeen publicly disclosed.

Since 2009, our data coverage hasincluded Dealogic information. However,comparative figures for previous yearshave not been restated.

Our analysis also excludes deals that, inour view, are not ‘pure’ financial servicesdeals involving corporate entities orentire operations, e.g. real estate dealsand sales/purchases of asset portfolioswhere the disclosed deal value representsthe value of assets sold.

Methodology



The main areas of our services are:

• lead advisory corporate finance;

• deal structuring, drawing onaccounting, regulation and taxrequirements;

• due diligence: business, financialand operational;

• business and asset valuations andfairness opinions;

• loan portfolio advisory servicesincluding performance analysis, duediligence and valuation;

• post-merger integration: synergyassessments, planning and projectmanagement;

• human resource and pensionscheme advice.

For more information on any of theabove services or if you have any otherenquiries, please contact:

Nick [email protected]

Fredrik [email protected]

About PwCM&A advisory services in thefinancial services sector

About this reportIn addition to the named authors of the articles, the main authors of andeditorial team for this report were Nick Page, a partner in PwC (UK)Transaction Services-Financial Services team in London, and FredrikJohansson, a director in PwC (UK) Strategy-Financial Services team in London.Other contributions were made by Andrew Mills of Insight Financial Researchand Maya Bhatti, Bridget Hallahane, Katrina Hallpike, Caroline Nurse andAntoine Royer of PwC (UK).

PwC is a leading consulting and accounting adviser for M&A in the financial services sector. Through ourCorporate Finance, Strategy, Structuring, Transaction Services, Valuation, Consulting, Human Resource andTax practices, we offer a full suite of M&A advisory services.

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www.pwc.com/financialservicesThis publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability,responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for anydecision based on it.

© 2010 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopersInternational Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act asagent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of itsmember firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions ofany other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

For further information on the Global Financial Services M&A Marketing programme or for additional copies please contact Maya Bhatti, Global Financial ServicesMarketing, PwC (UK) on +44 207 213 2302 or at [email protected]

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