SC Lowy makes bet on Italy’s banking system

A quiz question: which European country had the largest pool of non-performing loans in the third quarter of 2017, the last time the European Central Bank released overall data? 

Greece would be an obvious guess, but its banking system is too small. Minus points for Portugal, Ireland and Cyprus, which are even smaller. The correct answer is Italy, which had €195.97 billion of non-performing loans outstanding, around 11.85% of total loans in the country. 

This depressing data point might make Italy’s banking system seem like the last place a foreign investor would want to park their cash. But SC Lowy, a Hong Kong-based boutique investment bank founded by Deutsche Bank alumni Michel Löwy and Soo Cheon Lee, has done just that. 

The firm bought a controlling stake in Credito di Romagna (CDR) for €50 million in April, bailing out a firm that had been running at a loss for several years.

CDR is a minnow, with just 125 staff spread across 12 branches. Nor does it punch above its weight in profit terms: it lost €7.33 million in 2016, against revenues of €23.2 million. (The bank has not released 2017 figures.) 

Odd couple

But although it may look like an odd match for a boutique firm run by two globe-trotting investment bankers, CDR fits into SC Lowy’s plans in a number of ways.

First, the bank has a large book of non-performing loans, giving SC Lowy access to a pool of assets that sits firmly within its area of expertise. The firm was founded in 2009 as a distressed debt and high-yield loan trader, a job description that remains core to its identity. CDR had €81.14 million of sofferenze (suffering) loans at the end of 2016, compared with a target of €73.42 million. 

Second, the acquisition of CDR follows a template SC Lowy has already proved it can make work. The firm bought Korea’s Shinmin Mutual Savings Bank in 2013, a deal that closely echoes its latest venture. 

Shinmin, later renamed Choeun Savings Bank, was an obscure local lender struggling to stay afloat in the aftermath of a banking crisis. Chief executive Löwy does not give Euromoney specifics on the return the firm has achieved from this investment, but he is clear the gamble paid off.

Third, and perhaps most importantly, CDR’s European banking licence gives SC Lowy access to the eurozone market, a tantalizing proposition for a distressed debt specialist. This was the biggest attraction, particularly given the relatively low cost of SC Lowy’s investment, Löwy tells Euromoney.

“The Italian banking market is extremely fragmented,” he says. “You’ve got over 600 banks, including a lot of tiny banks that probably should not exist in today’s economy. It means the entry ticket isn’t that expensive.” 

We’re very happy with the retail side. It’s good funding and it’s a good business by itself 

 – Michel Löwy

In some ways, the acquisition creates an oddity. SC Lowy pushed ahead with management changes well before the deal was announced, taking three of the seven seats on the board and hiring a number of senior bankers. The net result is that a tiny provincial Italian lender with 125 staff now has its first head of investment banking – Nicola Guadagni, formerly of distressed debt specialist Credito Fondiario.

It comes as little surprise that Löwy is putting emphasis on the investment banking opportunities the business presents. He expects the bank’s staff to grow alongside its balance sheet over the next few years, but he says most hires will come at the senior level. 

As for the branch network, Löwy says it is too early to tell, but he doesn’t sound like the typical foreign buyer preparing a round of cuts.

“We’re very happy with the retail side,” he says. “It’s good funding and it’s a good business by itself. It’s not a business we’re looking to aggressively expand, but we certainly don’t want to change what doesn’t need to be changed.”

The acquisition means SC Lowy now gets access to CDR’s client base of more than 6,000 small and medium-sized enterprises. Löwy admits most of these clients will be too small to derive much benefit from SC Lowy’s investment banking experience, but he estimates that between 25 and 50 of those clients will add value to the parent company. 

As for the rest? Perhaps they’ll grow into it. 

Link to the source of information: www.euromoney.com