October 24, 2017 / 6:26 AM / 2 years ago

Investors skeptical as Polish banks moot merger plan

WARSAW (Reuters) - State-controlled Polish banks Pekao and Alior are considering merging, to bolster their positions as lenders struggle with regulatory pressure and ultra-low interest rates.

The banks signed a letter of intent on Monday to assess “different forms of potential cooperation or merger of both entities,” Pekao said in a statement on Tuesday, but the news sent both lenders’ shares down 5 percent as investors and analysts expressed doubts about the benefits of such a plan.

Pekao came under state control in June when it was sold by Italy’s Unicredit and a merger would cement its position as Poland’s second biggest bank, behind state-run PKO BP.

However, Pekao’s second-biggest shareholder, the state-run Polish Development Fund (PDR) which owns 12.8 percent, was skeptical.

“I doubt whether such a merger has a business sense and would be beneficial for bank’s clients. It would probably mean significant job cuts,” PFR Chief Executive Officer Pawel Borys told Reuters.

“From the point of view of the strategy for Pekao SA it would be better for the bank to concentrate on investment in IT rather than blocking itself in a merger,” he said.

PFR will announce its official stance regarding the potential plan once banks deliver their analysis, he said.

Bank Pekao SA and Alior Bank SA both belong to Central Europe’s biggest insurance group, Poland’s state-run PZU (PZU.WA), and have combined assets of 231 billion zloty ($64 billion), while PKO BP has assets of 286 billion zloty.

PZU bought into Alior in 2015 and has a 32 percent stake. It bought Pekao from Unicredit in June, together with PFR, as part of a government policy to bring banks back into Polish ownership.

Shares in Alior, Poland’s ninth largest bank, have risen by almost 30 percent this year as investors consider it a fast-growing aggressive modern bank that is well positioned to benefit from the shift to online banking and other technological changes in the sector.

Pekao shares, in contrast, have fallen 12 percent this year, as the bank expects little annual profit growth and investors fret it may cut its dividend. Some investors also dislike the bank coming under state control.

“The merged bank could not grow as quickly as if they were separated, so I don’t like this idea,” Michal Sobolewski, an analyst with BOS brokerage said.

“(I don’t like it) also because savings in bank mergers come mainly from cost savings, but in state-run banks the cost side is not always taken into account, while the social aspect is being taken into consideration,” he said.

Polish banks face rising regulatory pressure to increase their capital buffers while margins have been squeezed by record low Polish interest rates.

A merger would also diminish Pekao’s ability to pay out dividends as the capital adequacy ratio of the combined bank would be lower than that of a standalone Pekao SA, analysts said.

Spokespersons for Pekao and Alior declined to comment.

Reporting by Marcin Goclowski; Editing by Sherry Jacob-Phillips and Susan Fenton

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