Jul 2009 Financial News

Republic banks on premium value

Jul 23, 2009

Republic Bank, in which government has a 55 percent majority stake stemming from the deal to save CL Financial, would be a good acquisition at TT$70 per share but a senior bank official dismissed this, saying the shares were undervalued.

In its analysis, titled, “You cyah play sailor and fraid powder,” BMO capital markets said there is little doubt that Canadian banks such as CIBC, Scotiabank and Royal Bank of Canada, will have an interest in Republic Bank, if it indeed comes up for sale. The deal like this, said analysts of BMO would give Republic the traction it needs to expand outside Trinidad and Tobago and be able to compete with Scotiabank and Royal Bank of Canada (RBC).

Nigel Baptiste, executive director, Republic Bank, said while he would not comment on the pros and cons of the analysis found that Republic’s shares at TT$70 was seriously undervalued. On Monday, the bank’s shares traded at $85.99

“Seventy dollars is seriously undervaluing the bank’s shares, that’s $15 less than the existing share price,” Baptiste said, noting that the analysis did not take into consideration the fact that “somebody with majority will be looking for a premium on share price.”

There will not only be the sale of shares but control of the bank, he said, noting that any buyer would have to take this into account.

He said BMO ignored the transaction from the Government’s view, , noting that while they addressed a share exchange, the issue would always be the cash component and the premium for the shares.

“We are not going to dispose of our shares at TT$70, the bottom line is cash,” he said.

Any transaction, he added would involve a significant amount of cash and that is what shareholders would want.

According to the report, CIBC, through its 83 percent-owned subsidiary First Caribbean (FCIB), will top the list. Royal and Scotiabank will also be interested, though given their heft in Trinidad and Tobago, they are far less likely acquirers.

“We believe that outside of these three entities, there will be little strategic interest in Clico’s 55 percent stake in Republic,” BMO said, noting that despite Republic’s strategic appeal deploying large amounts of capital given the current pressures facing all banks could be a deterrent.

For CIBC to be interested however, Republic would need to be integrated into FCIB and that CIBC would be uninterested in a passive 55 percent holding in Republic, at anything other than fire-sale prices.

In a recent report, BMO, a leading North American financial services provider offering investment and corporate banking and advisory services, said there is little doubt that the global economic crisis will impact Republic — earnings could well be down 20–30 percent — over the next two years — but noted that the bank appears to be weathering the environment as well as could be expected.

BMO described Republic as well-capitalised, well-funded institution which has produced double-digit ROE (return on eequity) for several years. “EPS (earning per share) have doubled over the past five years and save for investment writedowns on holdings of FCIB and which was subsequently sold, growth has been relatively consistent,” it was noted.

The analysts took the view that government will be interested in unloading Clico’s stake in Republic and cited the option where it could have various quasi-government entities divide up and own the stake in Republic : National Insurance Board (NIB), the Unit Trust Corporation (UTC) and state-owned First Citizens .

On this, the analysts said however this approach was fraught with risk, noting that if these entities were interested in owning stakes in Republic, they would have done so already.

“ As such, it would be clear that the decision to invest (rather, to increase their stakes in the case of NIB and UTC, which already own 5–15 percent stakes) in Republic is driven by the government’s desire to sell, not by an objective purchase decision,” BMO said.

Without a “controlling shareholder,” Republic, BMO said would be a frequent merger rumour candidate, noting though that given its “strong management” and its position in the local economy, the bank could survive on its own. But when compared to the scale and diversity of its competitors in the Caribbean, the odds of some deal in the future rise, BMO said. Even though they both parted ways, BMO said it believed the merger of FCIB and Republic would make strategic sense as it would a real competitor to Royal Bank and Scotiabank in the Caribbean.

Although the 2007 acquisition of RBTT by Royal Bank of Canada created a solid company with the scale to compete in the region, the deal saw RBTT being removed from the local stock exchanges and removed the reality of local ownership..

“A merger of FCIB and Republic could create a local entity with material local ownership but with the scale to compete through the region,” it was noted.

In such a deal, Republic would be able to build material operations outside of Trinidad, while FCIB, with operations in Barbados, Cayman and Bahamas and Trinidad, would have the ability to expand into the “onshore” banking jurisdictions .

On a Republic Bank, FCIB merger, the benefits are quite positive for Republic and its shareholders. “A merged entity would be far better positioned to deal with the difficult environment. Republic is too heavily dependent on an oil-and-gas-based economy, while FCIB is probably too dependent on offshore banking and tourism. Neither looks terribly appetising at this stage but together we believe there would be expense and tax synergies, and opportunities to build longer term,” it was noted.

In addition, geographically diversified banks are better able to attract senior executive talent and this was an opportunity is to marry local knowledge with the benefits of scale. “We believe that Scotiabank has done this extremely well and we expect that RBC, following on its deal to buy RBTT, will also be successful,” it was noted.

The most likely scenario for a FCIB-Republic hook-up would involve a merger of equals, with a share exchange — both banks currently have market caps of close to US$2.2 billion and should each earn above US$150 million.

This, it was noted, would see CIBC diluted from 89 percent of FCIB to approximately 42 percent of the new entity. CIBC could follow up with a bid to get back above 50 percent.

“For holders such as the TT government, this would substantially improve liquidity, as they would be smaller shareholders in a bigger entity,” it was observed.

But in such a deal existing shareholders of Republic would not receive a meaningful premium. “This is true and is a reflection of the fact that Republic shareholders would not be selling out, but rather swapping for another equity. In addition, existing Republic shareholders would still have the leverage to a better banking market and the growth of the combined entity,” BMO said, noting that RBTT shareholders have virtually no further leverage to a regional banking franchise.

“In the final analysis, it isn’t possible to get something for nothing,” it pointed out, noting that while CIBC would allow itself to be diluted temporarily but not in the long term.

Whatever the outcome, BMO said it endorsed Canadian bank expansion in the Caribbean. “The market is attractive for Canadian banks because of the proximity, the long history of Canadians in the region, the level of concentration and the diversity of the individual markets,” it said.

“Depending on price and specifics, we believe that FCIB would be an excellent partner for Republic. A deal of the kind proposed would be modestly positive for CIBC. While the financial implications are minor, the deal would strategically improve the position of FCIB,” the report said.

Article by: Rory Rostant
Source: Trinidad Newsday
http://www.newsday.co.tt/businessday/0,104287.html
Published: Thursday, July 23 2009