OTP reportedly plans to acquire a Maltese bank

A Maltese bank for sale

Last September, HSBC announced that it had launched a strategic review of its Maltese business.

This announcement was not yet about selling the financial institution, but the options included that possibility.

The announcement of the review comes just days after the new CEO, Georges Elhedery, took over the leadership of the banking group. HSBC has recently carried out a number of divestments and asset sales in its Western markets, mainly in countries where it does not have a sufficient share of the local banking market, and is instead focusing on Asia.

In recent months, there have been successive reports in the Maltese press that HSBC may be getting closer to actually selling its subsidiary bank, and several potential buyers have emerged. The Maltese bank said on Tuesday that there were no preferred bidders to take over its local operations and that the process was still at an early stage. In a statement, the bank referred to a resolution passed at an extraordinary general meeting in February, in which shareholders authorised it to provide confidential information to potential bidders in order to make, confirm, withdraw or amend offers for significant stakes.

HSBC Malta has also announced that it has signed a confidentiality agreement with its largest shareholder, HSBC Continental Europe, and

will enter into confidentiality agreements with several potential bidders and provide them with confidential information.

No preferred bidder has been identified and the process is still at an early stage,

the bank said, adding that any potential transaction would require approval from both the Malta Financial Services Authority (MFSA) and the European Central Bank, which is expected to take several months.

OTP could be one of the interested parties

Earlier reports had suggested that APS Bank could be the buyer, with reports in the Maltese press suggesting that the financial institution is in advanced talks to buy HSBC Malta. But now a new name has been floated, with

the Times of Malta reporting that OTP is one of the top contenders interested in the Maltese financial institution.

What is there to know about the Maltese bank?

HSBC Bank Malta is the leading international financial institution in Malta, whose predecessor was founded in 1864, Barclays Bank International acquired a stake in 1975 and HSBC bought a 70% stake in 1999. It offers a full range of banking services, including retail and corporate banking and wealth management.

The financial institution employs more than 900 people and provides its services through 12 branches.

The bank has a balance sheet total of EUR 7.74 billion, or HUF 3,101 billion, which would place it in the middle of the OTP group (if OTP were to win) and increase the group's balance sheet total by 7%.

HSBC Bank Malta is the second largest bank in Malta in terms of total assets, behind market leader Bank of Valletta, with a market share of almost 21%.

Net loans are EUR 2.87 billion (~ HUF 1,150 billion) and deposits are EUR 6.16 billion (~ HUF 2,467 billion), which could increase OTP Group's figures by 4.7% and 7.8% respectively.

The Maltese bank is profitable, last year achieving the highest profit after tax in its history, €100 million, the equivalent of HUF 40 billion, which would otherwise add less than 4% to the OTP Group's profit.

HSBC in Malta had a return on equity of 17.5% last year, lower than the OTP Group's outstanding ROE of 23.5%. The cost-to-income ratio was 44.6% last year for the Maltese bank and 41.3% for OTP Group.

The capital position of the Maltese bank is stable, with the CET1 ratio rising from 20.6% to 22.6% last year (OTP Group CET1: 18.9%)

How much could the Maltese bank cost?

HSBC Bank Malta is a listed company, 70.03% of its shares are held indirectly by HSBC Holding through HSBC Continental Europe, with the remaining 29.97% held in public hands.

What is now for sale is a 70.03% block of shares owned by HSBC.

1. At the current stock market price of €1.52 per share and with 360.3 million shares in the company, this stake is worth €383.5 million, or HUF 153.6 billion. (Of course, the question is whether HSBC Bank Malta will remain listed after the sale, or whether an offer will also have to be made for those shares, for the time being only the 70% stake is expected.)

At the current share price, the Maltese bank's shares are trading at a P/BV multiplier of 0.9. However, we do not believe that such a large block of shares can be bought at market prices, and it is likely that the buyer will have to pay a higher price at a higher price multiplier.

2. At the end of last year, HSBC's equity in Malta was €600.9 million, or nearly HUF 241 billion at current exchange rates. If the Maltese bank were to be sold at book value, or P/BV times 1, a 70% stake would cost €421 million, or HUF 168.5 billion.

3. And if the Maltese bank could be bought at the current OTP share price of 1.19 P/BV, a 70% stake would cost nearly EUR 501 million, or nearly HUF 201 billion.

Last year, the OTP banking group achieved a profit after tax of HUF 1,076 billion, and based on analysts' expectations, the annual profit could exceed HUF 1,000 billion in the coming years, so there is plenty of room for such a large acquisition, even with the regular purchase of own shares and high dividends.

Cover photo (for illustration purposes only): Loop Images/Jason Wells via Getty Images