Financial services

01

How to buy
a bank in
emerging
markets

Mark
Richards
So, you want to buy a bank in an emerging
market and create value for your investors?
Pause for a moment. The evidence of value
creation is firmly against you just as RBS and
Fortiss shareholders found to their cost with
ABN AMRO. Yet, the wins that there have been
have been great wins. How do you ensure your
deal is one of the winners?
The more deals I work on, the more convinced
Ibecome of key common components of success:
discipline, insight, thorough due diligence, alignment
of interests, strong post-investment planning
and execution; and a clear-sighted vision of the
businessplan.
All the above are simple mantras which are
exceptionally hard to implement in practice. The
pitfalls are obvious the bank CEO who wants to
crown his career with one last strategic acquisition

and lets hubris outweigh value and liquidity

considerations; or the buyer who cuts corners on due
diligence in the excitement of a bargain. As one of
our competitors found in Thailand, US collateralised
debt obligation exposure can crop up in the most
unlikely markets. And, catching a falling knife to
snare a bargain often neutralises the bargain itself,
as Washington Mutual illustrates. Far better to let
the dust settle and pick up the pieces as Farallon
did with BCA in Indonesia a decade ago. Attention
todetailmatters.
So why invest in emerging market banks? As
Westernmarkets crashed into systemic crisis, it
was striking how many emerging financial services
markets rapidly recovered. There are exceptions
aplenty, but for the thoughtful investor the outlook
is bright. It is no paradox that emerging markets
should have proved resilient. They were lower geared,
were generally not reliant on wholesale funding,
and had simpler, more transparent balance sheets
and products. At Actis, we turned that insight to our
advantage in the summer of 2009 and made a multihundred million dollar investment to become the
largest single shareholder in Commercial International
Bank (CIB), Egypts largest private sector bank.

Financial services

01

AsWestern
markets crashed
into systemic crisis,
it was striking how
many emerging
financial services
markets rapidly
recovered

We were aware that CIBs share price had virtually

halved as international investors withdrew, but
we also knew the bank had delivered exceptional
growth rates and a return on equity that hovered
around 30%. Additionally, the broader Egyptian
banking system was in robust health with an
economy growing far more strongly than most.
We had tracked the bank for three years, building
a strong relationship with the chairman, and the
regulator. We arranged full due diligence via a team
of experienced international bankers who confirmed
risk management and liquidity were healthy. CIB
had invested very heavily to build a market-leading
capability in a fast-growth retail market that is just
beginning to build results (and was significantly
underestimated by market analysts). We also
discovered that Egyptian GAAP (Generally Accepted
Accounting Principles) accounting offers hidden
value upside for investors, compared with IFRS
(International Finance Reporting Standards), because
of a very cautious general provisioning policy. We
executed quickly. Today, we are working with CIB to
consolidate its market leadership position, executing
a clearly defined strategic plan agreed upfront.
Through our global footprint we achieve
compellingemerging market growth by combining
local knowledge from our regional people with
wide-ranging industry insight. When buying a
bank, we never forget the core questions that any
investormust ask:

Shareholder value discipline what are your criteria?

Is the countrys regulatory system good? Are we

investing in a healthy industry structure, economy

and rational growth market? Is supervision tight?

Do we understand the business and its balance

sheet as well as off balance sheet make-up and

market conditions?

Due diligence do not cut corners, and do

notcompromise on your needs there is always

another opportunity out there but you only
haveone career.

Understand the risk position and controls,

liquidity,the quality and alignment of the team

youwish to back, and review the board and
committee minutes these can reveal how well
governed abusiness is.

Who are you backing? And who are you

alignedwith your team or the existing team?

(Beclear many deals fail here). If appropriate,
doco-shareholders have common goals?

Have you a parenting advantage? Are you the

logical owner of the business?

Timing matters where are you in the credit cycle?

It is not a good idea to invest in boom markets.
Ismarket timing on your side?

Can you see value upside? Find the value

itmight be cost/revenues synergies, accelerated

growth, release of assets from the balance sheet;
or accounting policy arbitrage, be clear which
andhow much.

How are we paying? Cash or shares, and

whatsthe implication of that choice? Have you

got sufficient protection from reps and warranties
inthe shareholder agreement?

Once you have bought the bank, get control

seta100 day plan, and if appropriate a full

integration plan, bringing in talent as appropriate.

Rising incomes, rising product penetration, and

inmany cases markets which have barely scratched
the surface of their potential these are attributes
that most developed markets cannot match. The
satisfaction of helping to build great businesses is
powerful whether you are a strategic or a financial
investor. It can be done but never forget the
minefields that lurk at every turn.

Mark Richards heads the financial services team

at Actis, the emerging market private equity
specialist. Prior to joining Actis, Mark was
Corporate Development Director at Barclays.

www.act.is