DealTalk: Could BRIC banks ride to Europe's rescue?

LONDON Wed Sep 21, 2011 12:08pm EDT

LONDON (Reuters) - Top banks in China, Brazil and Russia are likely to be sizing up whether Europe's ailing banks are ripe for picking, though the eurozone's deep problems and grim growth prospects are expected to deter all but the most brave or ambitious.

The power shift of the past decade has left banks in fast growing BRIC countries well placed to ride to the rescue of Europe's lenders, who are teetering under worries about capital and funding, sluggish growth and a need to dramatically reshape.

Industrial & Commercial Bank of China (ICBC) (1398.HK) and other big Chinese banks, Brazil's Itau Unibanco (ITUB4.SA) and Russia's Sberbank SBER03.MM all have overseas ambitions and are likely to be running the rule over potential bargains, several bankers said.

"There's no question people in these countries are watching closely," said a senior banker involved in the financial sector. "M&A is one of the routes out of here."

But he and other bankers were doubtful anything will happen soon, while policymakers fail to get to grips with the euro zone debt crisis.

"If you are in China or Russia and looking for dramatic European expansion you can sit and wait with your gun loaded. Things aren't going to get any better for a while," the banker said.

Grabbing a strategic stake or going further with a takeover could boost a BRIC bank's capital markets platform and expertise, add diversity in case a domestic market wobbles or overheats, or just offer a financial bargain. And it would propel domestic powers onto the world stage.

"For banks that have long-term global aspirations, you could see them look to take advantage and make a strategic purchase," said Ajay Rawal, senior director for financials at restructuring advisor Alvarez & Marsal.

"But it needs a long-term view that says they are prepared for some balance sheet weakness and volatility, and then in time ... a return to greater profitability."

Banks in Ireland, Greece, Spain and elsewhere in the eurozone need money, and countries are warming to the need for action to shield lenders from sovereign losses, the IMF's chief economist said on Tuesday.

And it's not just small banks -- Societe Generale (SOGN.PA) and Unicredit (CRDI.MI) are cited by many analysts as in need of extra capital and Britain wants to sell stakes in Royal Bank of Scotland (RBS.L) and Lloyds (LLOY.L).

Most are trading at lowly valuations -- the sector's average is 0.6 times book value, and SocGen, Unicredit and RBS are all near 0.2-0.3 times book value.

AMBITIOUS ITAU?

Itau Unibanco is one of the most ambitious. Expansion in Portugal or Spain -- perhaps for a caja -- would be an obvious step, bankers said, although they also said Itau has talked in the past about alliances with bigger names such as BBVA (BBVA.MC) and Barclays (BARC.L).

Now among the world's top dozen banks by market value, Itau's CEO Roberto Setubal has signaled his international aspirations, but said he'd rather pay more for quality than take riskier distressed assets.

Sberbank SBER03.MM could also have the money and motive to bulk up. Now the third biggest bank in Europe by market value, Sberbank is expected to use this month's purchase of VBI, the eastern European arm of Austria's Volksbanken (OTVVp.VI), as a springboard for deals in Turkey, Poland and Romania, or Ukraine or Germany.

ICBC and Bank of China (601988.SS) have been linked with deals in Spain and Britain. One option is for them to buy a Spanish savings bank, another would be to back a move for state-owned Northern Rock or to take a stake in RBS, reversing the UK bank's stake in Bank of China, which it sold in 2009.

The problem is there's no obvious need for the banks to look at what's on offer in Europe. Brazil's banks are among the most profitable in the world and Itau's return on equity was 24 percent last year, while ICBC and China Construction Bank (601939.SS) delivered the biggest 2010 profits, each topping JPMorgan's (JPM.N) $25 billion.

Europe's banks are struggling to lift returns by shrinking balance sheets, quitting unprofitable businesses and slashing costs, and tougher capital standards and stricter regulations will continue to clamp hard on future profits.

"For the next 2, 3 or 4 years there's zero to 1 percent growth (in Europe), whereas they've got opportunities in their own markets where economies are growing between 4 and 8 percent. They're not short of new business opportunities, why would they want to buy a collapsing European franchise in an uncertain regulatory environment?" a senior Hong Kong-based banker said.

Strong local currencies could encourage a move, but politicians and regulators on both sides could put up major roadblocks while ill-timed investments in western banks in the early days of the financial crisis were a costly embarrassment for China.

That could deter not only banks, but the sovereign funds that many regard as more likely to take a bet, such as China Investment Corp, the Korea Investment Corp. or Singapore's Temasek.

"Potentially, we might see involvement of Asian and Middle Eastern institutions in the higher quality names. You would not fall off your chair if a major Chinese institution came through and took a material stake in a very valuable western banking franchise," said Gareth Hunt, analyst at Investec.

CIC was in Italy last week to discuss investments and is in talks to invest in a bid for Northern Rock, Sky News reported.

But Brazil looks like having a tough time this week to convince fellow BRICs to spend some of their $4 trillion in reserves to bankroll the purchase of European bonds, and against that backdrop banks or sovereign funds could be even more reluctant to pile into ailing lenders.

And, as Singapore's GIC -- which has lost over 70 percent on its 6 percent stake in UBS -- will testify, the road may be bumpy.

(Additional reporting by Douwe Miedema; Editing by Alexander Smith)

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