FRANKFURT (Reuters) - Investors over the last month have welcomed each new insider leak on Allianz’s (ALVG.DE) looming disposal of its loss-making Dresdner Bank but they are fooling themselves if they expect an exit from banking altogether.
That’s because Allianz is likely to wind up with a big stake in a new bank created by a merger that it may need to hold for years to ensure control over the sale of its insurance products.
Many observers say even an expected 35-40 percent stake in a new bank is better than the status quo: owning 100 percent of Dresdner which has twice swerved into the red since the insurer bought it for 24 billion euros ($37.6 billion) in 2001.
Shareholders renewed demands that Europe’s biggest insurer exit the bank after Dresdner made big subprime-linked writedowns and were pleased when Allianz said it would split Dresdner in two to prepare for banking consolidation in Germany.
While financial shares have been hammered over the last month on renewed fears about more crisis-related hits to earnings, with the DJ Stoxx indexes of European banks .SX7P and insurers .SXIP down around 13 percent, Allianz has eased by less than 4 percent as hopes for a Dresdner sale brightened.
Yet Dresdner is still cited as a major drag on Allianz’s shares. According to StarMine, which weights analysts’ forecasts according to their track record, Allianz trades at 6.3 times 12 month forward earnings, a discount to French rival AXA (AXAF.PA), which trades at a multiple of 6.6.
Reuters reported last week that Dresdner and Commerzbank (CBKG.DE) were making headway in their due diligence that could lead to concrete merger talks within weeks. <ID:nL01528391>
The effort is part of an expected broader consolidation of Germany’s commercial banks, with Deutsche Postbank DPBGn.DE and Citigroup’s (C.N) German retail bank also eyeing partners.
With the financial crisis making merger funding scarce, a Dresdner-Commerzbank marriage is likely to take the form of a share swap, analysts say, providing no ready cash that Allianz could use for share buybacks or big acquisitions elsewhere.
Union Investment fund manager Reiner Kloecker said a Commerzbank purchase of Dresdner appeared to be the most value-creating option for Dresdner, which is on Allianz’s books for 12 billion euros and which analysts value at 8-10.4 billion.
“I assume that Dresdner Bank could be sold at 80 percent of its book value. That would slightly diminish Allianz’s reported book value but it would free up risk capital and be earnings enhancing,” Kloecker said.
Union Investment is Allianz’s third-biggest shareholder with a stake of around 1.2 percent, according to Reuters data.
Allianz would benefit from no longer having to set aside capital to cover risks at Dresdner, redirecting the freed-up cash to investments with a better return.
JP Morgan analyst Michael Huttner estimated that a sale of Dresdner would cut forecast 2009 operating profit by 539 million euros, to 10.9 billion, but that Allianz could easily make up for the shortfall.
“Reinvestment of capital is key,” Huttner said in a research note, adding that the main threats to a stronger share price were if Allianz used any capital leeway to make acquisitions, or if it were forced to keep Dresdner Kleinwort, the investment bank responsible for Dresdner’s losses.
But even if Allianz can profitably redeploy its capital resources, maintaining a large stake in the new bank could continue to add volatility to the group’s earnings for years.
While some observers expect Allianz to gradually reduce its stake in the new bank, others say it would still need to hold at least 10-20 percent to guarantee a say in how the merged bank sells Allianz products through a widened branch network.
“I would expect them to maintain the shareholding in the combined entity,” said David Dalgas, a fund manager at BankInvest and an institutional shareholder in Allianz.
“They need to be a dominant minority shareholder. It’s not going to be a 5 percent shareholding because then they couldn’t influence the company and distribution,” Dalgas said.
Commerzbank sells insurance products in partnership with AMB Generali AMBG.DE, part of Italian insurer Generali (GASI.MI), but most analysts assume that the sales agreement, due to expire in 2010, would not present an insurmountable problem for a Dresdner-Commerzbank merger.
Editing by Sue Thomas