On 8 December 2001, BNP Paribas Group signed a definitive agreement to acquire United California Bank ("UCB"), a Los Angeles based retail banking institution with over 2,800 employees and 117 bank branches throughout the State of California, for $2.4 billion. The acquisition will be completed by BNP Paribas, which will acquire 100% of the outstanding shares of UCB, currently owned by the Japanese banking group UFJ Holdings Inc. ("UFJ"). The transaction must receive appropriate regulatory approvals prior to completion. The acquisition of UCB, together with BNP Paribas' Group existing US banking operations BancWest, will make BNP Paribas a leading retail banking group in the Western United States with 1.5 million customers, 370 bank branches and a 8,000 strong workforce.
A deal consistent with BNP Paribas Group's strategic business plan.
The expansion of retail banking, a highly profitable business line with substantial recurring profitability, was one of the priorities of the business plan unveiled in September 1999 at the time of the merger, which gave rise to BNP Paribas.
After US Federal Reserve approval on 4 December 2001 of BNP Paribas' purchase of the remaining 55% equity holding in BancWest, the acquisition of United California Bank is the second major step in BNP Paribas' plans to expand the Group's International Retail Banking operations in the Western US banking market this year.
The decision to carry out this new acquisition in California enables the Group to capitalise on three major fronts:
- The Western US retail banking market has high potential to deliver shareholder value given its balance between profitability and risks associated with this market, as well as the region's strong economic and demographic growth. California is the most populated state in the US, and one of the wealthiest with a $1,400 billion Gross State Product, comparable to France's Gross Domestic Product.
- With BancWest, BNP Paribas already has a competitive platform in the region, driven by strong growth and with a history of several successful acquisitions. This transaction will double the size of BNP Paribas Group's retail banking franchise in California providing opportunities for significant costs and revenues synergies.
- BNP Paribas' and BancWest's status as a Financial Holding Company in the US creates significant cross-selling opportunities within the Group.
United California Bank: a unique opportunity and an acquisition consistent with BNP Paribas strategy of expansion in the West Coast of the United States.
UCB traces its origin back to 1868 as the San Francisco Bank and expanded throughout Southern California as a result of various mergers and acquisitions, until its was sold to Sanwa in 1972. UCB's history and background are similar to BancWest; it has continued to grow and expand up to the present through both de novo and through a series of mergers and acquisitions, the most recent one being the merger with Tokai Bank of California in July 2001.
UCB has a total of 117 bank branches located mainly in Southern California (Los Angeles and Orange County) and in the San Francisco Bay Area. It has an excellent broad-based business presence in retail banking (with individual and business customers), commercial banking (medium-size businesses), and a leading market share in the vibrant Asian community in California. The bank's customer deposits total $8.8 billion.
UCB's cost/income ratio, 57.1% in 2000, reached 60.7% for the first nine months of 2001 following the merger with Tokai bank, whilst after tax return on equity stood at 15.1% and 11.3% respectively. The bank enjoys a solid capitalisation ratio, with a Tier 1 level of 10.5%.
UCB's lending to individual customers ($3.4 billion) and businesses ($5.7 billion) are diversified as well as high quality, non-performing loans accounting for 1.46% of total loans. Reserves set aside to cover these debts provide hefty insurance: total coverage of 158% and 121% coverage of loans to business.
BancWest: A remarkable record of high growth and controlled costs and risks.
BNP Paribas' US retail banking operation, BancWest, is now a fast-growing, highly profitable regional banking group. It was formed in 1998 out of the successful merger between Bank of the West (California) and First Hawaiian Bank, with 253 branches located principally in Hawaii as well as the six states in the West of the United States: California, Oregon, Washington, Idaho, Nevada, and New Mexico. BancWest has achieved this success through focusing on:
- Community banking activity: it offers the full range of banking products and services to its 1.2 million customers through its two brands Bank of the West and First Hawaiian Bank ;
- Lending capabilities on a regional and national basis throughout its areas of expertise: consumer credit as well as commercial and SME lending (SBA programme)
In the first nine months of 2001, BancWest achieved a 42% pre-tax return on allocated equity.
Over the past 10 years, BancWest has established a remarkable record in carrying out a string of mergers and acquisitions, as well as controlling cost trends, reducing its cost/income ratio from 78% in 1990 to 52% in 2001, while effectively managing risks.
Within BNP Paribas Group organisation, BancWest is part of the International Retail Banking business line, which has been consistently profitable and fast growing. This division contributed 12.5% to the Group's gross operating income in 2001 year to date.
BancWest and UCB have highly complementary operations; the acquisition of UCB will help the BNP Paribas Group create significant franchise value through the expansion of the BancWest organisation.
The addition of UCB to the BNP Paribas Group would create a powerful banking organisation in California and in the Western United States:
- The combination of BancWest and UCB will create a bank with a 3.3% market share and form the 4th largest full service bank in California. BancWest is also the largest banking institution in Hawaii, and the third in New Mexico.
- Given UCB's presence mainly in Southern California and Bank of the West's strength in the North, the BNP Paribas' Group retail operations will operate through 235 branch offices in California, providing an expanded and balanced statewide geographic reach.
- UCB and BancWest have a similar corporate culture as community banks with strong core deposits gathering capabilities, allowing for further development of lending capabilities.
Significant cost and revenue synergies
An initial analysis of the synergies has indicated that cost savings of approximately $36 million are achievable in 2002 and will reach $82 million in 2003 (representing approx. 23% of UCB's core operating costs). Incremental revenues from the merger are expected to be at least $3.8 million in 2002 and $15 million in 2003 (amounting to approx. 2.4% of UCB's revenues).
The UCB shares will be acquired from UFJ for $2.4 billion in cash financed by the Group's cash flow and the 2002 current financing program.
The acquisition is expected to be earnings neutral in 2002, and will be accretive by 0.9% in 2003, after impact of goodwill. On a cash basis, the transaction will be EPS accretive in 2002 and 2003 by 1.4% and 2.6%, respectively.
An increase of the relative weight of Retail Banking operations within BNP Paribas, consistent with the Group strategic business plan.
Following the acquisition of UCB, retail banking will reach 45% (from 43 %), and, based on the financial performance as at the end of September 2001, it would result in a 52% pro forma contribution to the Group's revenues (up from 50%). It will be instrumental in strengthening the Group's retail banking operations consistent with BNP Paribas' business plan unveiled at the time of the merger between BNP and Paribas in 1999.
This transaction should allow for diversification and balance of BNP Paribas retail banking activities:
- Retail Banking in France will represent 23% of allocated capital
- Retail Financial Services and International Retail Banking will represent respectively 12% and 10% of allocated capital, i.e. 22% in total.
BNP Paribas is a global European-based banking and financial services group that has a presence in 87 countries worldwide, and in all the major financial centres. BNP Paribas has leading positions in retail banking, corporate and investment banking, asset management, private banking, insurance and securities services. It conducts an aggressive cross-selling strategy amongst all its business lines. With 694 million euros in total assets, 20.6 million euros in equity, and 4.13 billion euros net income in 2000, BNP Paribas is France's largest listed bank and one of the Eurozone's leading banks in terms of stock market capitalisation.
BNP Paribas was advised in this transaction by Lehman Brothers.