Banco Sabadell SA agreed to acquire stricken Spanish lender Caja de Ahorros del Mediterraneo for one euro in a deal financed and guaranteed by Spain’s commercial lenders to shield the national budget from losses.
Spain’s deposit-guarantee fund, which is financed by the country’s banks, will first inject 5.25 billion euros ($7 billion) into Alicante-based CAM. The impact on Spain’s budget will be “nil” as the deposit fund will also guarantee losses arising over the next decade, the state bailout fund said.
The deal will create a lender with 166 billion euros in assets, Spain’s fifth-largest, combining Sabadell with a savings bank that was seized by the Bank of Spain in July after souring property loans wrecked its business. Spanish bank mergers are gathering pace, with Banco Popular Espanol SA announcing a 1.35 billion-euro takeover of Banco Pastor SA in October.
“The first impression is that this may be quite a good deal for Sabadell,” said Antonio Ramirez, an analyst at Keefe Bruyette & Woods in London.
Sabadell said in a presentation today that the “game-changing deal” will save more than 300 million euros a year, increase its client base to five million and add to earnings per share. Sabadell may close about 300 branches out of a combined network of 2,279, Chief Executive Officer Jaime Guardiola said on a conference call.
Sabadell shares rose for the eighth day in nine sessions, climbing 5.5 percent in Madrid to 2.89 euros at 2:58 p.m. local time, compared with a 0.1 percent drop in the 46-member Bloomberg Europe Banks and Financial Services Index.
The sale allows Spain’s central bank to remove CAM from public ownership as it seeks to speed consolidation in a financial system burdened by 176 billion euros of troubled assets linked to real estate.
CAM ran up losses of 1.73 billion euros in the first nine months of the year. Bad loans as a proportion of total loans at the combined lender based on June data would be 10.9 percent, Sabadell said.
“We expect such a large and complex deal to carry significant execution risk for Sabadell and to add further workload on a bank which is still digesting its own exposure to troubled real-estate developers,” Andrea Filtri and Andres Williams, London-based analysts at Mediobanca SpA who rated Sabadell “underperform,” said in a report. Sabadell may have entered the deal to “avoid marginalization on the Spanish banking scene,” they wrote.
“It’s a very tough operation, which means it’s going to get maximum concentration and the best management,” Josep Oliu, Sabadell’s chairman, said at a televised news conference.
Spain, fighting to rein in the euro region’s third-biggest budget deficit, said in October that any losses arising from its overhaul of banks would be borne by the financial industry’s deposit-guarantee fund rather than by the taxpayer. It followed up on Dec. 2 by increasing banks’ contributions to that fund in a move criticized by the Spanish Banking Association as “surprising and unjust.”
That fund will guarantee 80 percent of losses that may arise from 24.6 billion euros of problem assets after existing provisions of 3.9 billion euros, Sabadell said.
Those troubled assets include loans to property developers, refinanced mortgage loans to individuals and some loans to small and medium-sized companies linked to the building and real-estate industry, an official from the FROB said yesterday. He said independent auditors estimate losses of 5.5 billion euros at CAM, a lender that rose and fell with the Mediterranean-area real-estate boom.
The FROB is providing liquidity guarantees of 12.5 billion euros, Sabadell said. Those would be used, for example, in the unlikely event that the European Central Bank stopped its liquidity operations, the FROB official said yesterday.
CAM faces maturities of 28.8 billion euros in wholesale debt, an amount that includes 7.7 billion euros borrowed from the European Central Bank, Sabadell said. That amount includes 9.54 billion euros coming due through 2013.
As of September, the combined lender would have a core Tier 1 capital ratio under European Banking Authority criteria of 9 percent. The bank may raise as much as 1 billion euros from a share sale in the future when market conditions make it possible, Chief Financial Officer Tomas Varela said.
The central bank replaced CAM’s managers in July and placed the bank under administration of the government’s bank bailout fund, which injected 2.8 billion euros into its business and provided a 3 billion-euro credit line to keep it operating. The figure of 5.25 billion euros to be provided by the deposit-guarantee fund includes that 2.8 billion-euro cost, FROB said.
CAM’s ratio of defaults to loans hit 21 percent in September, more than double what it had last December, as more than half its loans to property developers went bad.
Mariano Rajoy, Spain’s prime minister-elect after winning elections on Nov. 20, has pledged to accelerate a cleanup of the country’s banks that has so far cost 17.7 billion euros. He has asked for at least two studies on how to create a so-called bad bank to buy soured assets from lenders at a discount, two people with knowledge of the matter said on Nov. 25.
The Bank of Spain seized Banco de Valencia SA on Nov. 21, the latest of seven lenders taken over by the central bank. The lender with 24 billion euros of assets had been under inspection by the Bank of Spain because it had fallen short of new minimum capital requirements put in place by the government this year.