By Liam Proud
Banks usually make for tricky private equity targets. Turnoffs include demanding regulators and high leverage, which stops buyers from piling on further debt. But when prices are low enough, the numbers can work. Lone Star’s roughly 700 million euro offer for Bank of Cyprus (BOCH.CY) shows that the sector may have reached such a level in Europe.
The US fund’s interest marks a sharp turnaround in fortunes for Bank of Cyprus, which was bailed out in 2013 amid the euro zone debt crisis and had to inflict losses on some depositors. Chief Executive Panicos Nicolaou churned out a respectable 7.3 per cent return on tangible equity (ROTE) in the first half of 2022, excluding one-off charges. That helps explain why the bank has rebuffed three offers from US fund Lone Star, the last of which valued it at almost 0.4 times tangible equity. The buyout group is considering whether to make a further bid and has until Sept. 30 to do so.
It can probably afford to pay more. Nicolaou is gunning for a 10 per cent ROTE next year, although analysts are pencilling in just 8 per cent for 2025, based on Visible Alpha data. Even if Bank of Cyprus hits that lower number, a fair valuation might be closer to 0.8 times tangible equity, or around 1.3 billion euros – double Lone Star’s offer.
Investors have given Nicolaou’s ambitions short shrift, valuing the bank at roughly one-third of tangible book value in recent months. That’s partly because of previously high bad debts and a historic connection to Russia. Both risks have diminished: analysts expect the bank’s ratio of non-performing loans to shrink to 5 per cent next year from over 30 per cent at the start of 2020. Russia, Belarus and Ukraine account for just 1 per cent of net loans and 5 per cent of deposits.
Lowly bank valuations across Europe may create other opportunities for cash-rich private equity buyers. Other potential targets include UK so-called challenger banks like Virgin Money (VMUK.L) and Metro Bank (MTRO.L), which trade at 0.4 times and 0.2 times forward tangible book value respectively. Carlyle (CG.O) was sniffing around Metro late in 2021.
Private equity bidders could also help giants who are looking to slim down, as HSBC (0005.HK) proved when it agreed to sell its French retail business to Cerberus Capital Management. Other lenders like Société Générale (SOGN.PA), which has a sprawling collection of eastern European assets, could in theory hop on the trend. In making the case for bank buyouts, Lone Star may be doing the whole sector a favour.
Private equity group Lone Star on Sept. 6 said that it was considering a revised offer for Bank of Cyprus after being rebuffed with three attempts earlier this year. The latest bid, at 1.51 euros per share, valued the lender’s equity at roughly 700 million euros.
Bank of Cyprus shares were trading at 1.43 euros on Sept. 21.