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BZ WBK'S Buy of Deutsche Bank's Polish Assets Is Credit Neutral.

Warsaw/London: Fitch Ratings expects Bank Zachodni WBK's (BZ WBK, BBB+/Stable/bbb+) proposed acquisition of the core parts of Deutsche Bank's Polish subsidiary (DBPL) will be credit-neutral. Our view reflects the small size of the target, the substantial planned capital increase to finance the transaction and the limited impact on BZ WBK's key credit metrics after the acquisition.

BZ WBK yesterday entered into an agreement to acquire a carve-out of DBPL's core business from Deutsche Bank for an estimated PLN1.29 billion (EUR306 million). The transaction is subject to regulatory approvals and BZ WBK expects closing in the fourth quarter of 2018. BZ WBK will finance 80% of the purchase through issuing new shares to Deutsche Bank AG with the 20% balance settled in cash.

The acquisition includes retail banking, private banking, SME business and the bank's brokerage house. DBPL's focus on affluent clients will complement BZ WBK's client base and strengthen its already well-established domestic market franchise. DBPL's corporate business and foreign-currency mortgage portfolio are excluded from the transaction.

The transaction will increase BZ WBK's gross loans, deposits and assets under management by about 16%, 9% and 5%, respectively. BZ WBK also expects to increase its market shares in loans by about 160bp and deposits by about 90bp to 11.7% and 11%, respectively. The risks for BZ WBK from the acquired portfolio are modest due to their good asset quality. The bank's impaired loans ratio of 6% at end-September 2017 will decrease due to the transaction by about 50bp, with provision coverage largely unchanged.

BZ WBK will also benefit from the dilution of its own foreign-currency mortgage portfolio. Upon the completion of the deal, the share of foreign-currency mortgages will fall to about 10.7% from 12.5% reported at end-September 2017.

Distribution networks of both banks largely overlap, supporting the potential for cost synergies, which BZ WBK estimates will be PLN129 million in 2021. BZ WBK expects that cost synergies will exceed restructuring costs by PLN80 million from 2018 to 2021. This is relatively modest compared with BZ BWK's 9M17 operating profit of PLN2.8 billion.

Fitch does not expect the bank's capital position to weaken significantly as a result of this transaction. BZ WBK's capitalisation is strong with a Fitch Core Capital ratio of 17.3% at end-September 2017 and the estimated decrease of 110bp of FCC is manageable due to a planned capital increase. The new capital taken by Deutsche Bank will not materially dilute the shareholding in BZ WBK's of its parent, Banco Santander (a decrease by about 2.7%) or impact Fitch's assessment of support.

BZ WBK's funding and liquidity profile should weaken modestly, as the DBPL business being purchased is about 65% financed by deposits and 35% by borrowing from Deutsche Bank. This will be replaced by BZ WBK funding upon deal completion. We estimate the loans-to-deposit ratio to increase to about 107% after completion of the transaction, excluding any potential deposit build-up prior to closing in 12 months. This is moderately weaker than the bank's current 100% ratio (at end-September 2017) and similar average levels for the wider banking sector.

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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Mar 5, 2018
Words:520
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