42. Acquisition of Raiffeisen-Leasing Polska SA by PKO Leasing SA

Description of the transaction

On 2 November 2016, PKO Bank Polski SA (as the guarantor), Raiffeisen Bank International AG (as the seller) and PKO Leasing SA (as the acquirer) signed an agreement on the sale of 100% of shares in Raiffeisen-Leasing Polska SA (RLPL) by Raiffeisen Bank International AG (RBI AG) to PKO Leasing SA. The transaction was closed on 1 December 2016 after the conditions precedent had been met, including, i.a., gaining the required anti-monopoly consents in Poland and Ukraine.

As a result of the aforementioned transaction, PKO Leasing SA purchased 1 500 038 ordinary shares in Raiffeisen-Leasing Polska SA with a nominal value of PLN 100 each, representing 100% of the Company’s share capital and entitling to 100% of the voting rights at the General Meeting of the Company. The purchase price amounted to PLN 850 million. The purchase of the shares was financed entirely with a loan granted by PKO Bank Polski SA.

The business operations of the acquired company consist of conducting leasing activities and granting loans.

Due to the purchase of RLPL, its subsidiaries joined the PKO Leasing SA Group:

  • Raiffeisen-Leasing Real Estate Sp. z o.o. – the Company’s business activities consist of financing real estate in the form of leases; as at 31 December 2016, the Company’s share capital amounted to PLN 50 000 and consisted of 100 shares with a nominal value of PLN 500 each,
  • ‘Raiffeisen Insurance Agency’ Sp. z o.o. – an insurance agency whose activities consist of creating insurance products and programmes for the customers of financial institutions; as at 31 December 2016, the Company’s share capital amounted to PLN 200 000 and consisted of 4 000 shares with a nominal value of PLN 50 each,
  • Raiffeisen-Leasing Service Sp. z o.o. – the Company’s business activities consist of storing, preparing and active sales of post-debt-collection or post-contractual objects purchased from RLPL as well as granting loans; as at 31 December 2016, the Company’s share capital amounted to PLN 200 000 and consisted of 4 000 shares with a nominal value of PLN 50 each; the Company’s sole shareholder is ‘Raiffeisen Insurance Agency’ Sp. z o.o.,
  • ROOF Poland Leasing 2014 DAC, with its registered office in Ireland – a special purpose vehicle established to service the securitization of lease receivables conducted within the RLPL Group; the Company issues bonds to raise funds for the purchase of receivables from Raiffeisen-Leasing Polska SA; as at 31 December 2016, the Company’s share capital amounted to EUR 1 and equals 1 share taken up by BADB Charitable Trust Ltd.; RLPL controls the aforementioned Company in accordance with IFRS 10, despite the fact that it does not hold any shares in it.

As part of the transaction PKO Bank Polski SA replaced the financing granted to RLPL and its subsidiaries by Raiffeisen Bank International AG or by its Group entities (i.e. it granted loans to RLPL Group companies, the funds from which were earmarked for repayment of the loans granted to the companies by Raiffeisen Bank International AG companies) in the total amount of PLN 2 412 million and EUR 255.6 million. The transaction was financed with PKO Bank Polski SA’s own funds. At the same time, PKO Bank Polski SA issued a guarantee up to EUR 52 million on behalf of the Council of Europe Development Bank (CEB) with reference to the repayment of the loan granted to RLPL, and signed a loan facility agreement with RLPL for PLN 300 million, which will be earmarked for repurchase of the Company’s bonds from Raiffeisen Bank Polska SA and from other bondholders.

In 2017, both companies, i.e. PKO Leasing and Raiffeisen-Leasing Polska SA, are planned to be merged, including the performance of a legal merger in April 2017.

Settlement of the acquisition transaction

The transaction was settled under the acquisition method in accordance with IFRS 3, which requires identifying the acquirer, determining the acquisition date, recognizing and measuring the identifiable acquired assets and assumed liabilities measured at fair value as at the acquisition date, and all non-controlling shares in the acquired entity, and disclosure and measurement of goodwill or gain on a bargain purchase.

Taking into consideration the fact that the control over RLPL and its companies was assumed as of 1 December 2016, the acquisition transaction was settled based on consolidated financial statements of RLPL as at 30 November 2016 and updated in respect of material transactions which took place between 30 November 2016 and 1 December 2016, i.e. the date of assuming control.

The consideration transferred and the value of all non-controlling shares in the acquired company

The acquisition price of RLPL has been determined provisionally at the amount of the cash paid, due to the fact that PKO Leasing SA has the right to bring, within 3 months of the acquisition date, claims against RBI AG with regard to financial and other transactions stipulated in the agreement for the purchase of shares in RLPL SA which may result In an outflow of cash and conducted within the RLPL Group between 1 July 2016 and the acquisition date. As at the date of these financial statements, the identification of these transactions has not been completed and the amount of the potential claims against RBI AG, which affects the final acquisition price, has not been determined. For the purposes of preparing the financial statements for 2016, the amount of PLN 850 million was adopted as the consideration paid, to be adjusted in future should any outflows be identified.

The consideration paid for the shares in companies of the Raiffeisen - Leasing Polska SA Groupnumber of sharesin PLN million
- acquired from Raiffeisen Bank International AG1 500 038850.0
Total 1 500 038 850.0

PKO Leasing SA holds 100% shares in the acquired companies; therefore, there are no non-controlling shares in the acquired entities.

Recognition and measurement of the identifiable acquired assets and assumed liabilities measured in accordance with IFRS

As at the date of preparing these financial statements, an initial, provisional valuation and purchase price allocation was performed, especially with respect to the portfolio of lease receivables and loans granted, and the identification and valuation of contingent liabilities. The final settlement may differ from the initial settlement described in these financial statements.

In accordance with IFRS 3.45, the Group has to determine the final amounts within 12 months, i.e. by 30 November 2017.

The data presented below, relating to the measurement of identifiable assets and assumed liabilities at their fair values, is based on an identification conducted from the perspective of the whole RLPL Group.

Statement of financial position - ASSETSData of the RLPL Group as at the acquisition date, 1.12.2016 (as the amounts derived from the financial statements) Adjustments due to fair value measurement and customer relationsFair value of assets acquired
    
Amounts due from banks279.4 279.4
Loans and advances to customers6 058.724.66 083.3
Inventories78.1-78.1
Intangible assets14.364.078.3
Tangible fixed assets159.3-159.3
Current income tax receivables16.8 16.8
Deferred income tax assets432.6(16.8)415.8
Other assets59.1-59.1
TOTAL ASSETS 7 098.3 71.8 7 170.1

Statement of financial position - LIABILITIES AND NET ASSETSData of the RLPL Group as at the acquisition date, 1.12.2016 (as the amounts derived from the financial statements) Adjustments due to fair value measurement and customer relationsFair value of assets acquired
Amounts due to other banks4 005.9-4 005.9
Amounts due to customers696.5-696.5
Debt securities in issue1 557.2-1 557.2
Other liabilities112.9-112.9
Current income tax liabilities4.4 4.4
Provisions0.5-0.5
LIABILITIES TOTAL 6 377.4 - 6 377.4
    
NET ASSETS 720.9 71.8 792.7
   

Information on assumptions and valuation methods adopted for identified assets acquired and liabilities assumed as at 1 December 2016 

  • Loans and advances to customers

The tables below present loans and advances to customers acquired at fair values as at 1 December 2016.

Loans and advances to customersData of the RLPL Group as at the acquisition date, 1.12.2016 (as the amounts derived from the financial statements) Adjustments due to fair value measurementFair value of assets acquired
Loans and advances to customers, gross, of which:6 353.324.66 377.9
corporate, of which:6 234.524.66 259.1
finance lease receivables5 655.524.65 680.1
consumer, of which:118.8-118.8
finance lease receivables7.1-7.1
Impairment allowances on loans and advances, of which:(294.6)-(294.6)
impairment allowances on finance lease receivables(239.5)-(239.5)
Loans and advances to customers, net 6 058.7 24.6 6 083.3

Loans and advances to customers by method of calculating impairment allowancesData of the RLPL Group as at the acquisition date, 1.12.2016 (as the amounts derived from the financial statements) Adjustments due to fair value measurementFair value of assets acquired
individual basis, impaired, of which:378.8 378.8
finance lease receivables331.1 331.1
group basis (IBNR), of which:5 974.524.65 999.1
finance lease receivables5 331.524.65 356.1
Loans and advances granted, gross, of which: 6 353.3 24.6 6 377.9
finance lease receivables, gross 5 662.6 24.6 5 687.2
Impairment allowances - individual basis, impaired, of which:(220.3) (220.3)
lease receivables(186.8) (186.8)
Impairment allowances - group basis (IBNR), of which:(74.3) (74.3)
lease receivables(52.7) (52.7)
Impairment allowances on loans and advances, of which: (294.6) - (294.6)
lease receivables (239.5) - (239.5)
Loans and advances granted, net 6 058.7 24.6 6 083.3
lease receivables, net 5 423.1 24.6 5 447.7

Loans and advances to customers by client segmentData of the RLPL Group as at the acquisition date, 1.12.2016 (as the amounts derived from the financial statements) Adjustments due to fair value measurementFair value of assets acquired
Loans and advances to customers, gross, of which: 6 353.3 24.6 6 377.9
corporate1 891.25.41 896.6
retail and private banking118.8-118.8
small and medium enterprises4 343.319.24 362.5
Impairment allowances on loans and advances (294.6) - (294.6)
Loans and advances to customers, net 6 058.7 24.6 6 083.3

Loans and advances to customers - exposure to credit riskData of the RLPL Group as at the acquisition date, 1.12.2016 (as the amounts derived from the financial statements) Adjustments due to fair value measurementFair value of assets acquired
Loans and advances impaired, assesed on an individual basis378.8-378.8
Loans and advances not impaired, withour recognised individual impairment, of which:5 974.524.65 999.1
not past due5 266.116.05 282.1
past due708.48.6717.0
Loans and advances to customers, gross 6 353.3 24.6 6 377.9
Impairment allowances on loans and advances to customers(294.6)-(294.6)
for exposures with recognized impairment(220.3)-(220.3)
for exposures without recognized impairment and without recognized premises for impairment(74.3)-(74.3)
Loans and advances to customers, net 6 058.7 24.6 6 083.3
   

  • Loans and advances to customers – lease receivables

The fair value of the portfolio of finance lease receivables and loans was determined using the discounted cash flow method (an income approach) based on discounted cash flows from contracts concluded. The expected cash flows were determined as the sum of contractual principal instalments, including residual values of the leased assets, and interest payments determined based on forward rates of the variable interest components and effective contractual margins.

The expected cash flows were discounted using effective market rates calculated as the sum of the relevant forward rate and the effective market margin. The effective market margins were calculated as the arithmetic means of the margins on homogeneous product groups in transactions concluded during the last month by Raiffeisen-Leasing Polska SA and PKO Leasing SA. They were determined taking into account the product type, period of financing, any downpayment made and the condition of the leased asset. In the Group’s opinion, the arithmetic mean of the margins realized in the last month by Raiffeisen-Leasing Polska SA and PKO Leasing SA represents a good approximation of the market margins as at the measurement date.

During the valuation, it has been concluded that net carrying amounts represent a good approximation of the fair value for impaired exposures, exposures denominated in USD and CHF, exposures for which the leased assets have not been disposed and groups of exposures for which it has been concluded that RLPL margins are at the market level as at the valuation date (the portfolio of loans and receivables and lease receivables financing real estate).

The total amount of adjustments resulting from the fair value measurement of finance lease receivables and loans amounted to PLN 24.6 million.

  • Intangible assets

As part of accounting for the acquisition transaction, customer relationships were identified resulting from the lease agreements concluded, amounting to PLN 64 million. Customer relationships in the area of lease agreements were analysed separately for the corporate segment and the retail segment. The excess rate of return valuation method was used to measure customer relationships.

Under this method, the value is determined based on the discounted future cash flows resulting from an additional income generated by the company which has a given intangible asset in excess of the income generated by a company which does not have such an asset. The method also involves considering the costs and investments associated with the intangible asset, marketing expenses, etc. To estimate the fair value of customer relationships, relationships with key customers are identified for individual CGU, the expected period of their further existence is estimated, as well as income from and costs directly associated with the relationships. From cash flows so determined, the general expenses in each year (including amortization) are deducted. Next, the Contributory Asset Charge (‘CAC’) which represents other assets contributing to generating income from customer relationships (impact of fixed assets, trademark, and organized workforce) is deducted. Contributory asset charges correspond to the required return from individual tangible and intangible assets used to generate income from customer relationships. The required return is calculated, respectively, for fixed assets, trademark, the organized workforce and the capital requirement, and is included in income from customer relationships.

Cash flows calculated for individual years are then discounted using the discount rate, increased by an appropriate premium for intangible assets. The value of discounted cash flows derived in this manner is the estimated value of the intangible asset.

In accordance with the RLPL acquisition agreement, any trademarks held by the Raiffeisen-Leasing SA Group will be excluded from the assets acquired by PKO Leasing SA. PKO Leasing SA has the right to use the ‘Raiffeisen’ trademark in the transition period without incurring any related costs.

Goodwill arising on the Transaction

As a result of the acquisition of shares in RLPL, goodwill was recognised as the difference between the consideration paid and the net value of identifiable assets acquired and liabilities assumed, measured in accordance with IFRS.

 Total RLPL Group companies
Consideration paid850.0
Net identifiable amount of acquired assets and liabilities792.7
Goodwill 57.3
of which, attributable to the following segments: 
corporate segment16.2
retail segment41.1
 

The purpose of acquiring shares in RLPL was for the Group to achieve economic benefits by increasing the customer base for the lease portfolio. The synergies resulting from the takeover of Raiffeisen-Leasing Polska SA and its subsidiaries will include strengthening the position of the leader in the lease services segment and expanding the distribution network. Moreover, the acquisition of a company which operates as an insurance agent will accelerate the achievement of the strategic goals in the area of bancassurance.

Additional information

Due to the fact that the merger took place during the reporting period, the income statement of the acquired entities jointly, from the acquisition date to 31 December 2016, and the income statement of the Group for 2016 is presented below, as if the date of acquisition was 1 January 2016.

The table below presents the amounts of revenues and expenses and profits or losses of the RLPL Group since the acquisition date, i.e. 1 December 2016.

Income statementData of the RLPL Group from the aqusition date to 31.12.2016
Interest income27.0
Interest expense(12.4)
Net interest income 14.6
Fee and commission income4.7
Fee and commission expense0.4
Net fee and commission income 5.1
Other operating income4.7
Other operating expense(0.9)
Net other operating income and expense 3.8
Net impairment allowance and write-downs(9.2)
Administrative expenses(11.9)
Operating profit2.4
Profit before income tax 2.4
Income tax expense(0.4)
Net profit (including non-controlling shareholders)  2.0
Profit (loss) attributable to non-controlling shareholders 2.0
   

The table below presents the amounts of profit and loss account of the Group, including the RLPL Group, for the current reporting period, calculated as if the acquisition date was the beginning of the annual reporting period, i.e. 1 January 2016.

 2016
  
Interest income10 251.7
Interest expense(2 354.8)
Net interest income 7 896.9
Fee and commission income3 632.7
Fee and commission expense(901.4)
Net fee and commission income 2 731.3
Dividend income10.3
Net income from financial instruments measured at fair value4.4
Gains less losses from investment securities506.1
Net foreign exchange gains (losses)502.9
Other operating income739.1
Other operating expense(338.9)
Net other operating income and expense 400.2
Net impairment allowance and write-downs(1 653.3)
Administrative expenses(5 706.8)
Tax on certain financial institutions(828.9)
Operating profit 3 863.1
Share in profit (loss) of associates and joint ventures34.5
Profit before income tax 3 897.6
Income tax expense(945.4)
Net profit (including non-controlling shareholders)2 952.2
Profit (loss) attributable to non-controlling shareholders2.1
Net profit attributable to equity holders of the parent company 2 950.1