Air Bank, the fast-growing Czech neo-bank owned by the recently deceased Czech billionaire Petr Kellner, is close to swallowing the larger listed Moneta Money Bank, which would make it one of the biggest banks in the highly profitable Czech market.

Kellner’s privately-held PPF Group bought close to 29% of Moneta for Czech koruna (CZK) 11.3bn (€435 mn) in a CZK80/share public offer in early March that was backed by the managers of the larger bank, ranked sixth in the market by assets. PPF has also proposed a merger with its unlisted online retail start-up Air Bank, ranked eighth by assets, which would end up giving it close to 60% of the combined group.

But the merger has now been thrown into doubt by the billionaire’s death in a helicopter crash in Alaska on March 27, with Czech media speculating that it could now be called off or modified. Moneta’s shares have fallen more than 2% since trading opened on Monday, March 29.

PPF executives insist that their plans are unchanged and that Kellner’s long-term dream of building a strong Czech bank will be fulfilled. “PPF will continue to work on its projects according to the plans and visions set out by Petr Kellner. This is the right way forward and it is what Petr would have wished for,” Ladislav Bartonicek, who has taken over as interim CEO, told PPF staff in a letter this week.

Air Bank CEO Michal Strcula, who has led the bank from the start, confirmed that the plan remains the same. “Ultimately, it will be on both Air Bank and Moneta shareholders to agree, but the primary driver of the transaction is that it makes sense. Therefore the transaction is still going forward,” he said.

It nevertheless remains unclear whether PPF would be more ready to raise the acquisition price if necessary, now that Kellner, who was used to getting his way, is no longer in charge.

The two banks are now carrying out due diligence on each other, with the results expected in mid April. PPF might then need just another 15% of shareholders in order to give it the 75% majority to approve the merger, assuming that only 60% of shareholders vote at the general meeting. This would give PPF control of the combined bank.

Assuming the merger does go through, the rise of Air Bank will be an earthquake for the Czech banking system. The combined banking group will have a total of 2.5 million customers in a country of 10.7 million people, putting it in third place in terms of customers, and ranking it second in consumer finance.

Challenger bank

Air Bank, founded in 2011, is the most high profile of the home-grown challenger banks on the Czech market. They also include Fio and Equa Bank (which is currently being taken over by Austria’s RBI). Air Bank claims to be the second most successful neo-bank in the CEE region in terms of market share and revenue per customer, but unlike the leader, Russia’s Tinkoff, which was founded in 2006, right from the beginning it has offered full-service retail banking.

Air Bank has successfully challenged the highly profitable traditional banks by offering simple contracts, lower fees and better service to internet-savvy customers who are also cost conscious.

“Air Bank was the one that positioned itself in a different area from the beginning – the other incumbents are trying to catch up,” Strcula told bne IntelliNews in an interview just before Kellner’s death. “We cannot rely on physical distribution and that forces us to think how to get the service to customers in a digital way.”

The Air Bank IT system is modern and bespoke, unlike the patched together legacy systems of the traditional banks. The bank does not have a front-end system for its branches – they use the same system as clients do.

“It is hugely important to be without legacy systems issues,” said Strcula. “All systems are quite modern and we developed them as we wanted them to be developed, tailored to the needs of our customers.”

Strcula said Air Bank was one of the first Czech banks to offer Apple Pay and Google Pay. It releases a dozen new versions of its mobile app every year to introduce new features and streamline existing ones. For example, the latest release introduced chatbots, including voicebots that navigate clients to block their card with a voice command if they have to.

“We can get new things out in weeks to customers,” added Strcula. “That gives us a huge, huge advantage. That is something that the incumbent banks have difficulty catching up on.”

Air Bank’s customers tend to be younger, more urban and wealthier than other banks’ clients, and they are much more comfortable with the internet. Although it has 34 branches, most customers do the overwhelming majority of their transactions either via computer or smartphone – around 600,000 of their 865,000 customers use mobile banking.

Air Bank customers also use their bank cards 15 times a month, 50% more than peers, and 22% use their accounts daily, double the market average.

This internet-focused strategy has worked on the Czech market as the country has often been an early adopter of new banking technologies such as contactless cards. The pandemic has merely accelerated the digital trend, and made customers of other banks wish their lenders had more up-to-date systems.

Strcula said that what differentiates Air Bank form other neo-banks in Europe is that it has always been a fully-fledged digital retail bank with its focus on the primary banking relationship – rather than starting out as a monoliner – and that it is already highly profitable, with a return on tangible equity last year of 17.2%.

“The root cause behind the results is that we have been by nature a very savvy online-focused organisation from the beginning,” said Strcula. “We are clearly the biggest and fastest growing neo-bank on the market.”

Though it has domestic neo-bank competitors – and the traditional players such as Erste Group’s Ceska Sporitelna have improved their online offering – Strcula said so far it has been largely protected from wider neo-bank competititon because Czechia is outside the Eurozone. “The Czech crown made it a bit more difficult for some of the other fintech and digital banks to tap into [the market],” he pointed out.

Rich valuation

The plan to merge with Moneta has been controversial, partly because of Kellner’s reputation as the killer whale in the Czech fish tank, partly because of the valuation of Air Bank.

This was Kellner’s second attempt to merge the two banks. Two years after Moneta’s CZK35bn IPO in 2016, he offered to sell it Air Bank for CZK19.75bn, 2.2 times the book value; MMB replied with an offer of CZK18.5bn, which Kellner rejected.

The new bid is in the form of a reverse takeover that values Moneta at almost CZK 41bn. PPF is in the process of acquiring just under the 30% share threshold. If it exceeded the threshold, it would have to make a mandatory offer. By taking the approach it is, PPF is now in a commanding position to push through a merger with the larger bank that will also give it a listing.

PPF proposes that Moneta issues new shares to buy Air Bank, peer-to-peer lender Zonky, and consumer lender Home Credit’s Czech and Slovak units. The ratio of the shares between the two banks would be roughly 60:40, so, with its existing shares, PPF would end up with close to 60% of the enlarged group. It would then make a mandatory offer for the remainder at the same CZK80 price, a 19% premium to the last close before the original offer announced in January. It says it does not intend to delist the combined group.

The valuation in the current bid has been criticised not so much because of the public offer price – in a research note in January, Citi has a slightly higher target price for Moneta shares of CZK84 – but because of the valuation of Air Bank in the merger.

While Moneta is valued at around CZK40bn, or 1.5 times book value, according to Citi, Air Bank is valued at CZK26.9bn, a chunky 2.6 times book, significantly more than the rejected bid of three years ago, at a time when the pandemic is making banking valuations extremely uncertain.

“These valuations appear rich against historical valuations for the assets offered by Moneta,” said Citi, which valued the PPF assets at around half of Moneta’s.

Air Bank points to its higher rate of profitability – its ROE was double that of Moneta’s 10.8 last year, according to Citi – as well as its lean cost structure (Moneta has four times as many branches) and, in particular, what it argues are its stronger growth prospects. Air Bank forecasts it will double its profit by 2023, even without Moneta.

Air Bank has been the fastest growing bank over the past 10 years, expanding its customer base by around 100,000 a year, or 0.9 percentage points of market share, up to its current 865,000 customers or 8.1% market share. It claims a 22% share of customers switching from other banks.

Its generally wealthier and younger customers mean that there is more opportunity to sell them new products such as consumer loans, pensions and other savings products as they get older, earning the bank fatter margins and fees. Air Bank’s close relationship via the internet with its customers will assist this process.

“This is the first time a bank had such regular interactions with their customers,” said Strcula. “That gives you a huge potential which we really like.”

Little overlap

Air Bank also argues that the merger offers the opportunity to achieve real synergies that will drive future growth. The merged bank would already be very strong in consumer credit, with an 18% retail lending market share. It would also be able to grow in other segments that Air Bank has hardly explored up to now.

Air Bank would contribute its well-known brand (though the future joint name is so far undecided) as well as its advanced IT system (though no decision has been made on the merged IT system). 

For its part, Moneta can offer its 160 branches (the fourth largest network) and its existing experience with SMEs and pensions, as well as its building savings and mortgage products, which have been enhanced by its recent acquisition of Wustenrot’s Czech business.

“We can hasten their digital transformation which can help them,” said Strcula. “They have products we did not yet develop.”

The fact that there is little overlap in terms of customer base, with Moneta strong among farmers and small towns, reduces cost synergies but enhances potential revenue synergies. 

But some analysts remain sceptical of both the Air Bank Group as a unit and the potential synergies with Moneta after any merger. On paper the Air Bank Group has 1.23 million customers, close to Moneta’s 1.4 million, but it remains three separate brands and so far there has been little overlap or cross-selling between the customers of the bank and Home Credit.  Arguably the group is more of an accounting notion than a coherent business, though Air Bank deposits are used within the group for Home Credit lending.

If Air Bank merged with Moneta, the differences between them also might be more of a problem than an advantage. Air Bank’s strong image might be diluted by Moneta and its customers could drift away.

“I’m not sure how Air Bank customers will like Moneta being part of Air Bank,” said Milan Lavicka, banking analyst of J&T Bank in Prague. “They might look just like another bank.”

Similarily, it is not clear how well Air Bank’s brand will be received by Moneta’s farmers and small town dwellers. Moneta has also invested significantly in its own IT system, so there may be more costs than savings in imposing Air Bank’s technology.

“The outlook for revenue synergies, and for the earnings outlook in general, is uncertain and we think shareholders may want different exchange terms to acquire the PPF assets,” noted Citi.

However, convincing PPF to change its bid will be tough, as the failed negotiations in 2018-19 showed. “PPF is not the kind of company to accept worse conditions than it offers,” commented J&T’s Lavicka.

Air Bank CEO Michal Strcula (photo Air Bank).