* PZU Q2 profit down 56 pct at 166 mln zlotys
* CEO tries to assure no future dividend yield cut is expected
* PZU part of govt plan to reduce foreign ownership of banks
* Potential Bank Pekao deal in focus (Adds CEO quotes and background)
By Marcin Goclowski
WARSAW, Aug 24 (Reuters) - Eastern Europe’s biggest insurer PZU reported a sharp fall in profit on Wednesday but said it plans to buy more local banks, with the Polish state-controlled firm central to a government policy to reduce foreign ownership in the finance industry.
The ruling conservative Law and Justice party (PiS) promised during its successful election campaign last year to significantly cut foreign ownership of Poland’s banks, which currently stands at around 58 percent.
The pledge forms part of its broader agenda to assume more control over the economy, and is also a popular move that sits well with voters angry over economic disparities.
PZU-owned Alior bought General Electric’s Polish banking arm BPH earlier this year, while sources told Reuters this week that the insurer is set to begin negotiations to buy Poland’s second-largest lender Bank Pekao SA from UniCredit.
“We still want to invest in the banking sector. It will consolidate around 5-6 players (in Poland),” PZU head Michal Krupinski told a news conference.
However, there are questions over how PZU will be able to finance these deals.
The company posted a 56 percent decline in its second-quarter net profit to 166 million zlotys ($43.52 million), against a consensus forecast of 243 million zlotys in a Reuters poll of analysts, with the fall mainly due to poor investment returns.
Its shares plummeted briefly to all time lows of 26.31 zlotys ($6.88) on Wednesday with investors concerned that PZU’s expansion plans would mean cutbacks in dividends.
But shares rebounded in later trade after Krupinski signalled the insurer, which is 34 percent state-owned with the remainder owned by small players, would maintain its dividend yield.
Standing at 7.65 percent, PZU offers the highest dividend yield this year among Polish blue chips.
“Our plans to grow do not mean that the dividend will fall. PZU has been a dividend company which has shared its profits generously and I want things to remain this way,” he said.
Poland’s Deputy Prime Minister Mateusz Morawiecki, who is an advocate of nationalising banks, sought to play down expectations in an interview with Reuters late on Tuesday that PZU was close to buying Pekao. Although sources said PZU’s chief executive was due to fly to Milan on Wednesday to hold discussions with UniCredit on Thursday.
The pressure to ramp up acquisitions - along with falling returns on the insurer’s investments - mean PZU could lose its reputation as one of the region’s most stable dividend payers, some analysts say.
“It is clear that the profits are damaged by the investment returns, which amounted to 10 million zlotys if you exclude 450 million zlotys contributed by Alior Bank, owned by PZU,” said DB Securities analyst Marcin Jablczynski.
PZU’s investment returns have been hit by broader weakness on the Warsaw bourse, which has lost 3.7 percent this year. Among others, PZU owns a 13 percent stake in Grupa Azoty , Poland’s biggest chemicals group, the share price of which has tumbled 33 percent since January.
PZU has already lost 20 percent of its value this year because of its poor results and investor fears over the state treasury’s desire for the insurer to buy back Pekao SA. ($1 = 3.8229 zlotys) (Editing by David Goodman and Alexandra Hudson)