Erste: OTP could become a very attractive takeover target

The share price of Hungarys leading bank, OTP, was heavily depressed by the recently published austerity measure plans, but started to recover at the end of the month. Erste said in a CEE Equity Monthly report on Thursday that the bank could become a “very attractive takeover target", which should provide support for its share price. Erste also commented OTPs purchase of Russias Investsberbank, saying the price it paid was reasonable.

“Although our estimates have some downside potential, due to the planned introduction of the tax on income from subsidized mortgage loans, the increased tax rate and potentially slower than expected growth of the loan portfolio, the current valuation is very attractive," Erste said.

Seeing the future of the “golden share“ regulation uncertain, Erste said “OTP could become a very attractive takeover target, which should also support its share price".

OTP has signed a purchase agreement for a 96.4 per cent stake in Russias Investsberbank Group (total assets EUR 979.5 million, total equity EUR 101.5 million). The sellers are unnamed private individuals and legal entities. OTP will pay USD 477 million (EUR 373 million) for the stake, which means a P/BV multiple of 3.7x.

“This is on the lower end of the prices paid in CEE in recent transactions, but in line with prices paid in Russia." (Raiffeisen International recently paid 3.6x for Russias Impexbank, while prices in Ukraine are higher.)

The closing of the deal is expected in autumn 2006.

“The price for Investsberbank Group looks very reasonable, in our view. Russia has one of the fastest growing banking sectors in the region, but bears higher risk than other CEE countries (exchange rate, political & legal risks)," Erste said.

OTP can finance the deal without a capital increase. The bank has a war chest of around EUR 1.5-1.6 billion (retained earnings, potential issue of hybrid capital, treasury shares). OTP and Raiffeisen International recently agreed on the purchase/sale of Raiffeisenbank Ukraine for EUR 650 million.

“Given the unfavorable changes in the Hungarian tax and macro environment and OTPs strong war chest, we definitely welcome M&A news outside Hungary. At the moment, almost 90 per cent of OTPs profit comes from Hungary (with almost 10 per cent coming from Bulgarian subsidiary DSK)."