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Potential merger of PZU units of Pekao and Alior to yield limited benefits

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ALIOR, PEKAO, PZU - A potential merger of insurer PZU's banking units Pekao and Alior would bring rather limited benefits, while conducting such an operation would be difficult and generate a number of risks, local analysts commented for PAP in the wake of the morning press reports.

According to findings of the daily Puls Biznesu, PZU, having considered several scenarios, is most likely to merge the two units but keep separate brands.

"While the concept of merging two banks from PZU group theoretically has a few advantages, such as a better use of capital at Pekao or cooperation in the field of IT, in practice it is highly risky," DM BOS analyst Michal Sobolewski commented.

Trigon DM's Maciej Marcinowski believes the idea could be triggered by factors other than purely business issues.

"Apparently, PZU has a problem with owning two banks and is probably in talks on the subject with regulator KNF, the analyst tells PAP.

Synergies would likely be limited, given that PZU seems reluctant to introduce any major cuts, and the distribution and branch network would not be optimized, the two analysts agree. Hence, significant cost savings should not be expected.

"It seems that the current owner would not be willing to make big cuts in the case of the merger and from the point of view of shareholders, these would be the most tangible advantages," Sobolewski argues. "Thus the question, why embark on a long-term process of the merger which drains managerial resources and creates the risk of client outflow if cost synergies are not the main goal of the process?"

Marcinowski concurs: ". . . merging the banks without optimizing sales and branch network gives limited synergies although there would be some - for instance a part of back office could be reduced."

Additionally, banks' profiles and price policies would be difficult to combine, Sobolewski underlined.

"Pekao focuses on the margin at the expense of growth, which given its scale of operations, is a good strategy," Sobolewski said. "Alior, on the other hand, is only building its assets and thus needs to have a different price and marketing policy. In the case of the merger, the most reasonable policy would be to maintain an approach typical for the bigger bank, which would automatically imply a reduction of acquisition potential and pace of growth."

The owner may also find it difficult to secure the consent of minority shareholders for the merger, as investors at the two institutions have different priorities - with focus on growth at one bank, and on stability and dividend at the other, Marcinowski points out.

". . . I assume that in the case of such an operation, Pekao would have to issue shares for Alior Bank's minority shareholders, setting some parity, and the operation would require 80% backing at the GM," he said.

Last but not least, the move would lead to an increase in systemic risk as a merger "of banks from the top ten would result in a significant concentration in the group of the biggest players," Sobolewski points out.

2017-06-20



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