The Romanian governent has officially decided to go ahead with the privatisation of CEC and has set a deadline of April 25 for binding bids, at the same time increasing the stake for sale to 85% (from 75% previously). The privatisation was started in the Autumn of 2005 but was placed on hold after preliminary bids failed to live up to the expectations of the government.
Bank's submitting non-binding bids for a 75% stake in CEC in November included OTP Bank, Dexia, National Bank of Greece, EFG Eurobank, Raiffeisen, Erste Bank and BMPS. At the time, it was reported in the press, citing unoffical sources, that OTP Bank submitted the second highest bid of EUR 270m after EFG Eurobank at EUR 300m. Apart from Erste Bank, which has agreed to purchase BCR, we would assume all of these potential buyers remain interested but its unclear whether the price will have risen substantially.
CEC has some EUR 1.3bn of assets giving it a market share of 5.6%, but it also has the largest retail branch network in the country with 1,400 branches. Profitability has been relatively low (2004A ROE of 11.4%, equity of EUR 149m, earnings of EUR 17m) but leaving a lot of room for improvement (cost/income of 83%). The EFG Eurobank offer valued the bank at a P/B of 2.7x, which is much lower than the 5.8x paid by Erste Bank for BCR.
At the valuation levels for CEC, indicated by the non-binding bids, it is unlikely that OTP Bank will have to raise a significant amount of capital (including the sale of treasury shares) to fund a successful purchase, unless it is also successful on other fronts. On Hungarian regulations, the bank had a tier 1 capital ratio of 8.46% at the end of 2005, which provided it with some EUR200m of excess capital (versus a 6% threshold) and the bank has a strong capacity to generate capital internally.
As OTP Bank faces stiff competition for CEC, we wouldn't expect a signifcant trading impact from the news. OTP Bank has demonstrated in the past that it would rather walk away from a transaction, than overpay for assets. We reiterate our Buy rating on OTP Bank.