A New Entrant to the United States Banking Market
Entry via Idaho
The struggles of non-U.S. (and non-Canadian) banks to find sustained success in the U.S. retail banking market is a well-known thing. Several banks in recent years have decided to retreat from U.S. retail banking to turn their focus elsewhere. This post looks at the story of the BAWAG Group, an Austrian bank that may be seeking to buck that trend.
A Very Abridged History
In 1922, Austrian politician Karl Renner founded an Arbeiterbank for the workers of Austria. Eventually the bank would come to be known as the Bank für Arbeit und Wirtschaft AG (BAWAG) and would have the Austrian Trade Union Federation as its majority shareholder.
In the mid-2000s, scandal struck. It came to light that BAWAG had lost at least a billion euros on bond and currency trades in the late 1990s and into 2000. BAWAG also allegedly “used offshore companies and accounts at the U.S. futures broker Refco” to conceal those losses and shift them to “companies that included six firms on the Caribbean island of Anguilla.”1
These and other revelations sparked a run by BAWAG depositors, eventually necessitating a May 2006 rescue coordinated by the Austrian government and other Austrian banks.
Austrian bank Bawag PSK was rescued from collapse on Tuesday. Creditors of bankrupt US broker Refco settled a $1.3bn lawsuit in New York and a last minute bail-out was agreed by the Vienna government and rival banks.
In an attempt to boost confidence in the bank, Austrian chancellor Wolfgang Schüssel and a string of ministers from his centre-right coalition queued to open accounts there on Tuesday.
At an early-morning press conference, Mr Schüssel said the state would give Bawag and its owner, the ÖGB trade union federation, a €900m ($1.1bn) guarantee to stem the massive outflow of funds that had nearly brought Austria’s fourth-largest lender to its knees.
In addition, several banks will inject €450m into Bawag to restore its balance sheet.
The trade union federation ultimately put BAWAG up for auction. A Cerberus-led consortium emerged as the winning bidder, and its 3.2 billion euro purchase of the bank closed in May 2007.
A decade of retrenching and refocusing followed, and in 2017 Cerberus and other shareholders, including GoldenTree Asset Management, floated 40.3% of the company back onto the public market, raising 1.9 billion euros in the largest ever Austrian IPO.
Since then Cerberus and GoldenTree have continued to sell down their stakes, such that BAWAG’s shareholder structure now looks pretty typical for a publicly held bank.
A 2022 Federal Reserve Board order describes the group’s current business model:
BAWAG P.S.K., with total assets of approximately $61.7 billion, is the fourth largest bank in Austria by asset size. BAWAG P.S.K. provides retail, business, and corporate banking services, including savings, payment, lending, leasing, factoring, and international real estate financing activities. The bank’s foreign operations include branches in Germany and the United Kingdom and subsidiaries in Germany and Switzerland that engage in activities such as leasing, factoring, and mortgage lending.
BAWAG P.S.K. is a wholly-owned subsidiary of BAWAG Group AG (“BAWAG Group” – consolidated assets of $63.7 billion), Vienna, Austria. BAWAG Group is a holding company for BAWAG P.S.K and three other foreign banks, as well as various nonbank companies.
BAWAG and the U.S. Market
In 2021, BAWAG P.S.K. applied to establish a representative office in Venice, California. This allowed BAWAG to use the Venice office to liaise with current and prospective clients, solicit new business and engage in certain back office functions. The California state regulator approved the opening of the office in November 2021, and Federal Reserve Board approval followed in January 2022.
The activities a foreign bank may conduct through a representative office are pretty limited,2 and thus for a foreign bank with real ambitions to engage in U.S. retail banking a representative office is not a viable alternative to actually controlling a U.S. bank.
So, in early February 2022, BAWAG announced that it had reached a deal to acquire Peak Bancorp, the parent company of Idaho First Bank, a state nonmember bank.
BAWAG Group will work with the current leadership team of Idaho First Bank to continue growing its community banking focused business in Idaho and adjacent markets, while also providing the operational support and financial strength of a broader banking group. The acquisition enables BAWAG Group to expand its footprint in the United States and better position it for future growth in one of the bank’s core markets.
At the end of the most recent quarter before the February 2022 announcement, Idaho First Bank had around $554 million in total assets.3 Its net income for the year ended December 31, 2021 was approximately $5.8 million.4
BAWAG’s press release stated that the group had agreed to pay $65 million in cash to acquire Peak Bancorp and Idaho First Bank, representing “a diluted per share price of $12.05.”5
Last week, the parties announced that they have obtained all required U.S. regulatory approvals. In the press release, BAWAG’s CEO stated that the “acquisition provides BAWAG Group with a US banking platform to drive organic growth in Idaho and across the United States, adding yet another channel for growth.”
The CEO of Peak Bancorp and Idaho First Bank added:
Today, more than ever, a community bank focused on serving main street businesses and local communities is vital to economic growth. We are excited about this transaction because it allows Idaho First to continue filling that role backed by the financial strength of BAWAG Group.
The transaction is expected to close on November 30, 2023.
I have no real view on how this is going to go, and so as per usual the point of this post is not to make any predictions or imply anything about BAWAG’s chances of success. Instead, the idea is just to (1) highlight a bank that I think will be interesting to watch and (2) briefly mention some U.S. bank regulatory nerd stuff, below.
Three Regulatory Things
In addition to being another example of the trend of using small and already existing U.S. banks as a vehicle for market entry (as opposed to building from zero with a de novo bank), here are three other things I thought were interesting about BAWAG’s acquisition.
Foreign Bank Entry Approval Timelines
According to the Federal Reserve Board’s latest H.2 report, the approval of BAWAG’s application came from the Federal Reserve Bank of San Francisco, acting under delegated authority, on October 25, 2023. This was just under 22 months from the date the transaction was first announced, and around 14 months from the date the application was first filed.
This blog has been interested occasionally in the ongoing effort by VersaBank, a Canadian bank that already has a nonbank U.S. presence, to acquire Stearns Bank Holdingford, N.A. The transaction was first announced in June 2022, and as part of that announcement the parties said closing was expected to happen before the end of October 2022. Since then the date has been continually pushed back, with VersaBank saying most recently that it was hoping for a decision “during autumn 2023.”
Obviously it is risky to draw comparisons between different fact patterns, different Reserve Banks processing the application, and so on, but the BAWAG situation suggests that VersaBank is not necessarily yet an outlier in terms of processing time, even if its initial predictions have proved too optimistic.
Best Egg
According to an August 2022 Federal Register notice, BAWAG owns 19.5% of Marlette Holdings, Inc., better known as the company behind Best Egg.6 Best Egg describes itself as “the leading financial confidence platform that provides flexible solutions to help people with limited savings confidently navigate their everyday financial lives. Best Egg supports customers through a growing suite of personal loan, credit card, flexible rent, and financial health tools.” Marlette raised $225 million in a Series E funding round in March 2022.
Because by acquiring Idaho First Bank BAWAG would become a bank holding company, and because BAWAG desired to retain its interest in Marlette, the group needed to find a source of authority to retain the stake in Marlette, and thereby engage in nonbanking activities, under Section 4 of the Bank Holding Company Act. BAWAG concluded that Section 4(c)(8) of the BHC Act provided the best, and perhaps only,7 available authority.
The August 2022 Federal Register notice linked above characterized Marlette as engaging in extending credit and servicing loans under Section 225.28(b)(1) of Reg Y. The interesting thing, though, is that a March 2023 supplemental notice later updated the description of Marlette’s activities and characterized them as follows:
activities related to brokering or servicing loans or other extensions of credit, financial and investment advisory activities, and data processing activities pursuant to section 225.28(b)(1), (b)(2), (b)(6), and (b)(14) of the Board's Regulation Y
It is not clear exactly what happened between August 2022 and March 2023 to result in this updated filing, but in any case the FRBSF on October 25, 2023, in addition to approving the Peak Bancorp acquisition, also approved the retention by BAWAG of its interest in Marlette. The H.2 report describes Marlette’s activities consistent with the March 2023 Federal Register description.
QFBO Exemptions
The most recent Board H.2 report also says that, in addition to the FRBSF’s approval of the transaction and the retention of the interest in Marlette, the Federal Reserve Board’s Director of the Division of Supervision and Regulation recently took the following action:
Banks, Foreign
Director, S&RBAWAG Group AG, Vienna, Austria—requests a determination of eligibility for exemptions available to qualifying foreign banking organizations.
Approved: October 24, 2023
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Those quotes come from a March 2006 New York Times article. See also this SEC enforcement action against BAWAG from a few months later.
Notably, permissible representative office activities do not include “contracting for any deposit or deposit-like liability, lending money, or engaging in any other banking activity for the foreign bank.” See 12 CFR 211.24(d)(1). A representative office is allowed to make credit decisions under certain circumstances, but only if (unlike BAWAG) the foreign bank operates a U.S. branch or agency. See 12 CFR 211.24(d)(2).
As of September 30, 2023, the bank’s total assets are now up to around $618 million.
Net income for 2022 was just under $5 million, and the bank’s net income for 2023 year to date is $4.48 million.
Most banks this size are privately held, but at least a small portion of Peak Bancorp’s shares trade on the OTC markets. Its average daily volume per MarketWatch is around $4,600, although last week it did around $111,000.
In fact I think Marlette has now officially changed its name to Best Egg, Inc., but because the Federal Reserve Board H.2 report on the approval still refers to Marlette, I use that name here.
The August 2022 Federal Register notice says the application sought to retain a 19.5% stake, without specifying whether some or all of this stake is held in the form of voting shares, but assuming that more than 5% of the shares are voting, then Section 4(c)(6) is obviously out. BAWAG also does not appear, as part of this initial application at least, to have made an FHC election.