Tuesday, October 09, 2018 ... /////

First dominant pure Czech bank may be being born

For centuries, Czechs have been savers who were conservative when it came to their finances. A consequence was that they trusted "our" currencies, preferred all payments and savings to be done in the domestic currency, and the currency was correspondingly stable. Relatively to our communist comrades, we had a hard currency during communism, too. Westerners have usually no clue about the huge differences between the individual post-communist countries. For example, Hungary has accumulated a huge debt and their forint has always been inflating and weak; Czechoslovakia has never had these problems.

Air Bank, the standardized interior

Our beloved emperor Franz Joseph I of Austria introduced the crown in September 1892, as 1/2 of the "gold coin" that had been a nearly stable unit of wealth since the Middle Ages. (As of 2018, Czechs still use the ironic term "pětka", or "the number five", for the 10-crown coin!) In 1918, exactly 100 years ago this month, Czechoslovakia kept the name of the currency and after 1927, Czechoslovak crown, which was introduced at par. After 1927, it was the only successor state of the monarchy that still kept the crown.

Our first finance minister Mr Alois Rašín was an effective practical man. He pushed the strong crown policy and by the late 1920s, Czechoslovakia had the hardest currency in Europe – clearly, those were very different times from the recent years when the Czech National Bank wanted to create the softest or the most undervalued currency of Europe.

The crown continued with various adjectives during the war (The Protectorate Crown), the post-war 3 years of opposition-free multi-party system, and the communism, 1948-1953. Currency reforms kept the "crown" at par – although this statement became meaningless especially in 1953 when the monetary reform violated the proportionality laws and the richer people (such as my grandfather and his son, my uncle – now in Australia) – were robbed of millions.

Even during communism, Czechoslovak banks worked in a way that was close to the operation of functional banks in the West. The only "minor" LOL difference was that no real shareholders were owning the banks themselves and they couldn't enjoy the profit. The communist government owned all banks and factories but internally, things worked in a similar way.

After the 1989 fall of communism, it was clear to Václav Klaus, the main engine behind the Czechoslovak and Czech journey back to capitalism, that companies had to be privatized. Some of them were sold to horny foreign investors, others were voucher privatized to the Czechoslovak and then just Czech public. The latter group was mostly made of the less competitive companies. Consequently, a much higher fraction of those companies were unsurprisingly bankrupt.

Klaus hesitated with the privatization of the banking sector. There have also been some unsuccessful attempts to make the banking sector work just fine. The Czech taxpayer had to pay for several bailouts, various buyers were capable of cherry-picking the positive assets while encouraging the rest of their companies with negative assets to go bust (it's the concept of "tunneling" that is so popular as a criticism against capitalism in Czechia).

Paradoxically, it was the founder of the modern Czech social democracy Miloš Zeman – currently reframed as our far right president ;-) by the PC press – who started bold steps with the privatization of the Czech banking sector in the late 1990s. All the banks that were large, mattered, and survived were bought by huge European banking houses: ČSOB by KBC (Belgium – although it has bought ruins of IPB previously owned by Japan's Nomura), Česká spořitelna by Erste (Austria; Č. spoř. was the main savings bank for ordinary people during communism and it is still one), Komerční banka by SocGen (France; KB is transformed from the "corporate" part of the State Bank of Czechoslovakia during communism), and Unicredit Bank by its namesake (Italy). I listed them as the fourth largest Czech banks by the 2017 profit.

So far, these Western European mothers have worked fine, it's regulated reasonably, too. But there was a growing feeling that we no longer need this leadership and an authentic Czech banking sector may arise. At this moment, Moneta Money Bank is Czechia's #5 bank by profit. It got this cute name some three years ago when General Electric sold it (it was GE Money Bank before that, in the late 1990s GE bought one of the non-profitable banks, Agrobanka). GE made a big mistake – in these years, Moneta has been doing much better than GE itself.

Moneta has a lot of 1-percentish stockholders now, the ownership structure is very fragmented. There are several rather large stockholders all of which are linked to JPMorgan in one way or another: JPMorgan and its namesakes and daughters control roughly 15-20 percent of Moneta Money Bank. "Moneta" is a great name, I think – some "coin" in Italian or something like that. Moneta has the most beloved Internet banking and phone apps in Czechia, commercials with the hairy cynical cat and famous actor Mr Jiří Bartoška as a physician. Also, it decided to attract certain rich consumers by building a charging station for electric vehicles at its branches.

The current price of the stock is some CZK 81; the total capitalization is CZK 42 billion. Recent dividends before taxation were CZK 10 and CZK 8 although only CZK 5.5 is expected for this year – the dividends are promised to soar again later. The net profit is 4 billion – a nice and real P/E=10.

There are smaller banks. Starting from the 6th place below Moneta, we have Raiffeisen (Austrian mother, it was rumored in July to buy Moneta, but said it wasn't feeling ready a week ago), J&T Bank (Czech bank, rather sophisticated investment orientation), mBank (Polish, but with the German Commerzbank metaowner, small consumers), Sberbank (Russian mother), Expobank (Russian owner Igor Kim who bought these branches from LBBW/BAWAG, German and Austrian owners), Air Bank (Czech, PPF, see below), Fio Bank (Czech, founded by students of my MathPhys Alma Mater, it has the main e-broker app for small stock traders; the main TV characters are actor Mr Jakub Kohák and his goat Miss Vlasta whom he sleeps with), Equa Bank (Czech-founded, with Malaysian and Italian history, now owned by AnaCap Britons).

In this list, Air Bank is special because it's owned by PPF, the global company of the wealthiest Czech and financier Mr Petr Kellner. His net worth is of order \$10 billion. PPF and its daughter Home Credit is making lots of profits in China, Russia, and elsewhere. He's made it but his presence on the Czech and Slovak markets is rather limited. (He financially affected me only by funding the Institute of Václav Klaus and the food at its parties LOL.) Home Credit CZ+SK and Air Bank are the main horses he owns here.

Yesterday, the Prague Stock Exchange was very excited – and then very nervous – about Moneta's and Kellner's plans to merge Moneta, Home Credit CZ+SK, and Air Bank. Moneta has been discussing acquisitions and mergers for many years. It was ready to be eaten – and it was ready to eat, investors with good ears have heard many times. Finally, the Raiffeisen-acquisition has evaporated and what we got was a merger instead.

Such a merger would create a huge bank that would be #1 on the Czech markets in some disciplines, like household loans, among top 4 in all disciplines, and could become #1 in several of them. The union would benefit from some "synergy", the added value of "having a union" itself. Moneta would contribute lots of consumers who are connected, great Internet and phone apps. Air Bank would contribute its disruptive culture. At the top of the blog post, you see the "green room for children to play". This is what all the Air Bank branches look like! It's sort of cool, I must admit. The green dogs are chairs for the owner of Air Bank, Petr Kellner, to sit on when he happens to visit. ;-)

On top of that, Air Bank has a famous and recognizable TV commercial campaign. In all the ads, you have a somewhat cynical, older, fatter banker from your "old bank" on the left, and the younger, fresh guy in the eye-glasses on the right. The guy from the "old bank" loves fees, catches in contracts, robbing of the consumers in general. The younger guy from Air Bank doesn't have any of it. Isn't it better? All of this converges to the motto of the bank, "Air Bank, even a bank is something you may love".

The united bank should be called Air Bank. Well, I like Moneta better but I don't really care much.

OK, some numbers about the merger. Recall that EUR 1 = 25.75 or so right now, the crown will keep on strengthening, however. Moneta has the net profit of CZK 4 billion a year, capitalization of CZK 42 billion divided among the CZK 81 stocks, dividends CZK 5.5 for the next year, P/E=10 a year ago (and capitalization/profit=10 still now). Kellner's PPF is selling Home Credit CZ+SK which has the annual net profit of CZK 0.6 billion and Air Bank which had the CZK 0.6 billion profit in 2017, too. But in 2016, it was just CZK 0.2 billion.

It's questionable how you should interpret these variable results. You could say that Air Bank is really disruptive and its profits are really "tripling almost every year" which is great – that's the optimistic Tesla-style interpretation of the trends. Alternatively, you could say that CZK 0.2 billion was closer to the normal profit and CZK 0.6 billion in 2017 was just a random upward fluke, perhaps a deliberately engineered one. I would simply pick the most obvious compromise. Just take the latest profit, CZK 0.6 billion, and assume it is the mean value for the future, too.

In combination, Air Bank and HomeCredit CZ+SK make the profit of some CZK 1.2 billion. Because the capitalization of Moneta is 10 times the profit, I think it's normal to expect that what Moneta devours should have the same ratio. So I think that Air Bank and HomeCredit CZ+SK is simply worth some 12 billion crowns only.

However, when merged with Moneta, it would create a 42+12=54 billion crown (capitalization) company. Kellner would be paid over CZK 6 billion in cash plus 24.5% of the new unified company (by newly printed stsocks) – which has the value of 54/4 = 13.5 billion. So in total, Kellner would be paid almost 20 billion crowns. For some banking houses that only have the value of 12 billion.

So we would clearly be overpaying 8 billion. This is almost 20% of the current capitalization of Moneta, so our existing stocks of Moneta could be expected to drop by a whopping 20% if there were no synergy. I think that JPMorgan and others should simply refuse the offer on the shareholder meeting.

Now, the combination of banks with different advantages leads to synergy, saving of expenses, combination of advantages of both (which I sketched above), and so on. But I think it's just plain silly for Moneta to "pay to Kellner" for the synergy. Kellner's banks are supposed to benefit from the expected synergy, too. The deal would clearly be much better for him than for the existing stockholders of Moneta. I would slash at least 20% of what he's expected to get – 5 billion in cash plus 20% of the new big bank. As it stands, it looks like another clever way for Kellner to benefit from someone else's.

Do people realize that the plan wants to almost double the value of this part of Kellner's assets (from 12 to 20) while the overpayment CZK 8 billion means the 20% reduction of the Moneta shareholders' worth? Is that fair?

Yesterday, after some uptick, the Moneta stock price dropped by over 4% at some moment. That's silly, of course: if the deal were agreed to be bad for the current Moneta shareholders – which is almost equivalent to the condition that the market price of the Moneta stock would be expected to drop because of the deal – then it is almost equivalent to expect that the shareholders would veto the deal at the shareholders' meeting, right? So the deal is either good for us and the stock should go up or it is bad and will be vetoed so the reaction by the stock price should be zero in that case. There's no reason for any drop. And indeed, the drop got reduced from 4.5% to 1.5% at the end of the trading. (Lots of small, financially unsophisticated investors were probably selling near CZK 78.50 because it was mentioned by the media as the "fixed price" of the newly issued stocks for Kellner. First, this assigned price of the new stocks is irrelevant because it's just a part of a justification of the non-cash part of compensation. Second, even if you thought that CZK 78.50 "should be" the value of all stocks because of that, Kellner will get those without the right to dividends in Spring 2019, so his stocks are CZK 5.5 cheaper than those sold at the stock exchange now – those stocks "should be" worth CZK 84 with those [unrealistic] assumptions.)

I think that the Moneta folks must understand various valuation models and synergy very well. But it seems to me that they got simply brainwashed by Kellner who told them that he is also giving us the synergy and we (Jamie Dimon, your humble correspondent, and a few others LOL) should thank and pay for that. Sorry, it's rubbish: both sides of the deal – both parts of the new Moneta – should benefit from the synergy which is why they should share its benefits. In fact, I think that Kellner's dependence on the synergy is smaller because Air Bank has such a low and questionable profitability. Kellner's companies offered to Moneta have the value around CZK 12 billion and it's just wrong to pay CZK 20 billion for them.