Critical Analysis of the Acquisition of Denizbank AS by Sberbank Rossii

To start discussing about the acquisition of Denizbank AS that was completed in late August of 2012, first here are some details about the bank that acquires Denizbank AS. The Sberbank Rossii is the largest bank in Russia and is the third largest in Europe (1). Sberbank Rossii provides services such as transfers, payment, currency exchange, credit cards, travel checks, mutual funds and others (2). Till March 31, 2013, the majority shares of the company were owned by the Central Bank of Russian Federation, which owns 52.3 % (2). As of today, Sberbank Rossii has more than 280,000 employees (2). 2012 proved to be the best year for the bank where Sberbank Rossii had their net income improved more than 10%, and it reached up to about $11.7 Billion USD (3). Not only that, but there is being a significant growth in dividends and earning per share in 2012, where there is a more than 127% growth in the dividend per share, and 7.75% growth in earning per share, and not to forget that earning per share was above the market normal rate. In the year 2012 alone, Sberbank Rossii escalated their cash flows by more than $3.2 Billion (3). Denizbank AS is a private turkey bank which is currently controlled by Sberbank Rossii since August 28, 2012 (4). The Denizbank AS was formerly controlled by French Belgian Bank Dexia from 2006 onwards (1). Denizbank AS provides services such as retail banking, corporate banking, private banking and commercial banking (5). The bank was put on sale by the financially discombobulated Dexia Group in 2011 and was then acquired by Sberbank Rossii in 2012 August, with the deal worth more than $3.6 Billion. At the end of March 2012, Denizbank AS book valued at $2.9 Billion. As of today, Denizbank As has more than 10,000 employees (5). 2012 was not a good year over all for Denizbank AS, as the bank recorded fall of more than 32%

of net income from the year 2011 (6). That too despite the fact that the bank record increase of more than 14% in the revenues, which mount the revenue to $2.70 Billion. Earnings per share decreased slightly, about 0.09% (6). The acquirer was Sberbank Rossii and its country of origin was Russia. The deal was announced on 8th of June, 2012 and was effective from 28th of August, 2012. The value of the merger was 3,861.65 Million Dollars. The target name of the merger was Denizbank AS which was to be established in Turkey. Denizbank AS since September 2012 has been completely controlled by Sberbank Rossii. Sberbank Rossii acquiring Denizbank was a strategic move to find ground in the booming Turkish market for the Russian Lenders and to get the share of high returns in the long run from the market. The immediate target that was set by the Sberbank Rossii for the Denizbank AS to generate profit of $400 to 600 Million (7) for the year 2012-2013. The long term target that was entrenched by the bank was to raise the assets three times in the coming six years (7).

As this acquisition was made by a Russian Bank, and they acquire a Turkish Bank, the strategic importance of such an event becomes evident. In the last decade or so, the Turk-Russia relationship has improved immensely with number of high profile visits from the top leadership of both countries. Specially the visit of then President of Russia and now Prime Minister of Russia, Dmitry Medvedev, in which both parties was agreed upon numerous deals that can increase the trade between the two countries up to 100 Billion USD in the next few years (8). Another example of the good relations between Turkey and Russia can be witnessed by the fact that the Turkish Minister of Economics revealed that both countries are interested in setting up a joint bank that can explode more ways to strengthen the economic ties between the two countries

(8). Thus, the acquisition of the Denizbank AS could prove to be another strategic move by both countries as the major shareholder of the acquirer company, Sberbank Rossii is the Central Bank of Russian Federation. The other main factors for acquiring Denizbank AS is the big economy, with the growth rate of more than 5% from the past 10 years, and with the influence of youth ever increasing on it, estimated more than 50% of the population is under 30 (9). Also Turkey is the 2nd fastest growing population in Eastern Europe (9). Apart from that, Denizbank AS was the only majority stake available in tier 1 and tier 2 banks in turkey, which enhance its value as well (9). It suits Sberbank Rossii strategic front as well, where they want to expand their international operations by 2014 (9). Cost of Risk for banks in turkey came down to 1.3% in year 2011 (9), making it one of the safest economy to invest in. Acquiring Denizbank AS gives Sberbank the luxury to lay foundation of their presence in one of the fastest economy in the world, as well as entering a supremely profitable banking sector. Valuation of Denizbank AS shows a mixture of good and average past 4 years. As we valuate Denizbank AS, we will start off by doing it by dividing total assets with total liabilities to see the strength of the company from, from the year starting 2009 to 2012. On the year end 2009, total assets were recorded at 25942.9 MillionTYR and total liabilities were 22974.95 Million, thus dividing them proves that in the year 2009, assets were 1.129 % greater than liabilities, in the year 2010 it proves that assets decreased from 1.29% in 2009 to come at 1.20% in 2010. In 2011 there was a further decrease in the on the assets side compared to liabilities, as it comes to 1.115%. In year 2012, assets decreased further down 1.111% that shows the decline on the asset side compared to liabilities. Then we valuate the Denizbank AS by dividing total assets with total equity. On the first year end of 2009, total assets were recorded at 25942.9 Million and total equity was recorded at

2965.95 Million Tyr, thus dividing them proves that assets to equity ratio was 8.741%. Next year in the year 2010, total assets were recorded at 33853.16 Million and total equity was recorded at 3646.15 Million, and dividing them affirm that the asset to equity ratio increased 9.284%. The following year in 2011, the assets to equity ratio increased from 9.248 %to 9.670, and it further increased to 10.001% in the year 2012. As there are no facts available on this, this seems like a company policy which was carried out in 2012 (13), where there is not complete dividends given to the shareholders or no dividends or profit given to the shareholders which is weakening the share in the short run but strengthening the company as a whole. As the last valuation model, we divided total net income by total assets to see the income to assets ratio. On the year end 2009, the total net income was recorded at 604.78 Million Tyr and total assets were recorded at 25342.9 Million Tyr, dividing them results that total net income to assets ratio in the year 2009 was 2.33%, though it falls down to 1.8 % in 2010. In 2011, total net income was recorded at 1061.55 Million Tyr and total assets were recorded at 44756.28 Million Tyr, dividing them confirms that the net income to asset ratio in 2011 was 2.4%. Though in the year 2012, it falls significantly to 1.3 %. If we take an overall average of 4 years, the total net income to asset ratio was 1.9% from the year 2009 to the year 2012.

Just to complete the valuation of the Denizbank AS, it is safe to conclude that the progress of the bank was below satisfactory in the past 4 years from 2009 to 2012. It can be seen from the valuation above that there is a continue decrease in asset to liability ratio from 2009 to 2012. Though there is increasing trend in asset to equity ratio, it does not seem real and the main reason for that by looking at the figures can be easily assessed, that is due to the fact that either there is no dividend given to shareholders or less amount were given on per share earnings.

There was continuous fluctuation that can be seen in the valuation model of net income to total assets, and in the last year alone it came sliding from 2.4% in 2011 to 1.3% in 2012 and hence that also proves the point that increase in equity ratio does not prove the real progress of the company in this case. Russias leading bank, Sberbank Rossii acquires Denizbank AS in Turkey, but paid a relatively high price for it. Sberbank Rossii is the first Russian Lender according to Bloomberg who buy a bank in Turkey (10), which is of significance importance keeping in mind that Sberbank Rossii most shares are owned by the Central Bank of Russian Federation (1). The deal was completed at such a high price due to a one simple reason, which is commonly visible that Turkish market is on the rise. As said by German Gref, the CEO of Sberbank Rossii, Penetration level in the Turkish banking sector is relatively low and the market has great potential for growth, endorsed the assumption that Turkey is one of the fastest growing economy in the world (10). In the same press conference he went on to say that Turkey will be the market which will be the most appealing market in the whole of Europe in the coming 15 years (10). That statement is also endorsed by the fact that Turkey Banking Industry records a profit of more than 11% in just the first four months, according to the Banking Regulations, from the similar duration the previous year (10). There were other key aspects of acquiring Denizbank AS, according to a release from Sberbank Rossii in their International Platform release of June 2012 (9), such as Denizbank AS deposits 70 % of the total liabilities, well-built and strong management over the years that was one of the key factors for Denizbank AS great past record and conservative risk management (9). Post-merger integration did not seem to cause big issues as Sberbank Rossii announced that they will retained all the current Denizbank Staff, as well retaining the Chief Executive of Denizbank AS, Hakan Ates (10). Sberbank also announce that there will be no reduction in the salary wages

of the employees at Denizbank AS (10). According to CEO of Sberbank Rossii, German Gref, Sberbank Rossii will not go into any other acquisition for now and will primarily focus on the growth of the biggest acquisition of the Russian Based Bank (10). He went on to say that Sberbank will help Denizbank AS to become an innovation Center for Europe (10). Post-merger performance of Sberbank Rossii have progressed really well. The comparison from 01-10-202 to 01-04-2013 shows that there is increase of 9.1 % in assets, 8.7 % increase in liabilities, as well as 11.4 % increase in equity, which is by no means a bad performance (11). On the other hand, for Denizbank AS, there is a slight increase of 1.14% in assets, as well as nearly same increase in liability which is about 1.14 %, and there is 1.10 increase in equity (12).

As to conclude my analysis over the deal of such a magnitude, I firmly believe that the deal would work in the best of interest of both organizations in the years to come. With such a strong structural organizations getting along together with one another to get the best results out in the market can really work with this acquisition. Acquiring of Denizbank AS have given the chance to Sberbank to enter into an ever increasing market with high potential in the coming future. It also gives Sberbank a chance to get benefited from the Turkey-Russia trade as this is the only Russian Lender to buy a bank in Turkey. Denizbank AS acquisition would also allow Sberbank Rossii to achieve its strategic goals such as a strong presence in the market of Austria (9). This deal was also more logical because there was no other bank available in the 1st or 2nd tier to be acquired, adding to that it gives them the luxury to add more cultural diversification in there firm as they want to enhance their business across borders, and with proven financial record in the past as well as experience management, it was not a bad deal for Sberbank Rossii. As for the Denizbank AS, they now have a much stronger setup who can back them and with the help of

such a professional organization, they can achieve a lot more than what they have done in the past because the potential is enormous in the bank, in the banking industry as well as in the Turkish market.

References: 1- http://en.wikipedia.org/wiki/Sberbank 2- http://www.google.co.uk/finance?q=MCX:SBERP&sq=Sberbank+Rossii&sp=1&ei=ybrlUYDGPKqT

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3- http://markets.ft.com/research/Markets/Tearsheets/Financials?s=SBER:MCX 4- http://en.wikipedia.org/wiki/Denizbank 5- http://www.google.co.uk/finance?q=Denizbank%20AS&ei=bqvlUbj4M62UwQP_oAE 6- http://markets.ft.com/research/Markets/Tearsheets/Financials?s=DENIZ:IST 7- http://www.bne.eu/dispatch22907/Banker_weekly_Mon_15_Oct#337935 8- http://en.wikipedia.org/wiki/Russia%E2%80%93Turkey_relations 9- http://sberbank.ru/common/img/uploaded/ir/docs/Analyst_presentation_DenizBank_acquisitio

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10- http://www.bloomberg.com/news/2012-06-08/sberbank-buys-denizbank-from-dexia-for-3-53billion.html

11- http://kuap.ru/banks/1481/balances/ 12- http://www.investing.com/equities/denizbank-balance-sheet 13- http://www.reuters.com/finance/stocks/DENIZ.IS/key-developments/article/2702682