Spanish Cajas Block Four-Way Merger in Obstacle to Bank Industry Overhaul

Three Spanish savings banks rejected a plan to merge into the nation’s third-largest caja, forcing Caja de Ahorros del Mediterraneo (CAM) to seek a state bailout.

Cajastur, Caja de Extremadura and Caja Cantabria voted against combining their businesses with CAM in a new entity known as Banco Base. CAM said it would seek support from the state rescue fund, which operates by taking ordinary shares with voting rights, meaning at least partial nationalization of any lender that seeks help.

The decision, two days after a Bank of Spain deadline for lenders to submit capital-raising plans, may complicate government efforts to rebuild confidence in Spain’s financial system by shepherding savings banks into mergers and strengthening their capital. CAM and Cajastur agreed last May with lenders in the regions of Cantabria and Extremadura to explore a merger that would create a bank with 124 billion euros ($175 billion) of assets.

“This shows that this is anything but a clean process,” said Cesar Molinas, an independent consultant and former head of European fixed-income strategy at Merrill Lynch & Co., in an interview, “The longer it takes the higher the cost is going to be because the balance sheets can deteriorate by the day.”

Banco Base, which sought 1.49 billion euros from the state fund last year, had planned to seek an additional 2.78 billion euros from the rescue pool. That’s almost double the amount the Bank of Spain said the lender would have to raise to meet minimum capital requirements. Banco Base was one of a dozen Spanish lenders that need a combined 15.2 billion euros in capital, the regulator said on March 10.

Raising Capital

Cajastur is now free from the terms of the merger contract it signed last July because “the necessary condition” to set it in motion wasn’t reached, the bank said. CAM said it “deeply regrets the decision taken by its partners” and will press ahead with the Banco Base project.

Lenders that need to raise capital must have their recapitalization plans approved by April 28, the Bank of Spain said in a statement yesterday, as it called on the Banco Base cajas to present their new strategies “immediately.”

Spain is rushing to bolster confidence in the economy and its banks as investors increase bets that Portugal may be forced to follow Greece and Ireland in seeking a European bailout. The Socialist government, which tightened capital requirements for lenders on Feb. 18, is implementing the deepest austerity measures in three decades to rein in the euro region’s third- largest budget deficit.

Bank Combinations

Those efforts brought down the nation’s borrowing costs even as yields on Portuguese debt reached record highs. The gap between Spanish and German borrowing costs was 187.4 basis points today, up from 186.7 yesterday though still more than a percentage point below the euro-era high of 298 basis points reached Nov. 30, after Ireland sought a rescue.

The merger to create Banco Base was part of a process that shrank the number of Spanish savings-bank groups to 17 from 45 as regulators pressured them to combine to cut costs and absorb losses from loans to property developers. The Banco Base members were the only savings banks of the 40 involved in mergers that hadn’t yet approved the process.

“You can be absolutely sure that our members knew our numbers in detail and that these numbers have figured in the minutes of Banco Base for months,” said Maria Dolores Amoros, general director of CAM, in a statement. “What has changed is the financial scenario and the demands of the Bank of Spain and the government, not CAM’s numbers.”

CAM, with assets of about 74 billion euros, and Cajastur were each set to have 40 percent of Banco Base. Caja de Extremadura was to hold 11 percent and Caja Cantabria 9 percent.

To contact the reporters on this story: Charles Penty in Madrid at cpenty@bloomberg.net Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net Craig Stirling at cstirling1@bloomberg.net

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