Spanish Banks Overseas Push Reflects Doubts on Recovery at Home

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Spain's Economic Growth
Pedestrians walk along a crowded shopping street in Barcelona. Renewed economic growth in Spain is starting to revive demand for credit after about 500 billion euros of loans drained from the financial system from the economy since 2008. Photographer: David Ramos/Bloomberg

A flurry of attempts by Spanish banks to buy foreign lenders may say more about the weakness of their home market than the strength of the opportunities chased abroad.

So far this year, CaixaBank SA has bid 1.1 billion euros ($1.18 billion) to buy the rest of Portugal’s Banco BPI SA that it doesn’t own, and Banco Sabadell SA has offered about 1.7 billion-pounds ($2.5 billion) for Britain’s TSB Banking Group Plc. Banco Popular Espanol SA also looked at buying Citigroup’s Central American consumer business before pulling out of talks.

The government and central bank are painting a rosy picture for Spain’s economy, with a weaker euro, lower oil prices and improved financing conditions helping to propel the country toward higher-than-expected growth after a five-year slump. Even so, the fact that banks are stepping up efforts to diversify their business may by symptomatic of their chances of reviving profit from Spain as record-low interest rates squeeze margins.

“The challenge banks face nowadays is to grow their profitability and they are looking abroad because in Spain it is going to be difficult to obtain the results they’re looking for,” Xavier Puig, a finance professor at Barcelona’s Pompeu Fabra University, said by phone.

Officials for Sabadell and CaixaBank declined to comment. CaixaBank said in February that the BPI deal was a logical step for an investment dating back 20 years. A spokesman for Popular pointed to the bank’s announcement of a plan to diversify geographically in 2013 to obtain 30 percent of profit from overseas in the medium term.

Popular Stance

Popular is looking at opportunities in the U.S. and Mexico, while in Europe it’s focused on the Spanish market and doesn’t rule out any deal, Chairman Angel Ron said Wednesday in Madrid. In Mexico “there will be a combination of organic growth but mainly through acquisitions,” Ron said.

The Bank of Spain last month raised its 2015 growth estimate to 2.8 percent from the 2 percent projected in December. Renewed economic growth in Spain is starting to revive demand for credit after about 500 billion euros of loans drained from the financial system from the economy since 2008.

New loans of less than 1 million euros for as long a year, a type of credit taken on by small and mid-sized businesses, rose 6.4 percent in the first two months of 2015 to 21.7 billion euros, according to Bank of Spain data. New household consumer credit is up 17 percent over the same period.

ECB Stimulus

The problem banks face is that the European Central Bank’s drive to stimulate growth and combat falling prices by buying private assets is forcing down returns on lending as banks also compete harder for higher-yielding loans, such as those to SMEs. Spanish banks’ margins on average loans narrowed the most among euro-area lenders, according to the ECB lending survey for the first quarter of 2015 published this month.

The 12-month euribor rate to which most of Spain’s 558 billion euros of mortgage loans are pegged has dropped to a record low 0.212 percent in March from a peak of 5.39 percent in 2008.

New SME loans were fetching interest rates of 3.79 percent in February, down from 4.88 percent a year ago, according to the Bank of Spain. While the amount of those new loans is increasing, the monthly flow is still 72 percent less than their peak in 2007, according to the central bank data.

“The emerging pressure on asset spreads will intensify,” Nick Anderson, an analyst at Berenberg Bank in London, said in an April 9 report. “Net interest margins are set to come under sustained pressure in the short term.”

CaixaBank Profit

CaixaBank, Spain’s third-biggest bank, has said it’s seeking to boost profitability four-fold by 2017 and Sabadell, the fifth-biggest, has committed to almost tripling annual earnings to 1 billion euros by 2016. Both are scheduled to report first-quarter results this week.

Growth in net interest income for Spanish domestic banks “should be driven by ongoing improvements in funding, despite the increasing pressure on asset yields and despite the ongoing reduction in net loans,” Daragh Quinn, an analyst with Nomura International in Madrid, wrote in a note to clients April 16.

Even so, interest rates close to zero will add to revenue pressures on banks and may explain why lenders such as Banco Bilbao Vizcaya Argentaria SA, which said last November it would boost its stake in Turkey’s Turkiye Garanti Bankasi AS, are investing more overseas, according to Berenberg’s Anderson.

He said he was “struck” by the fact that Sabadell plans to buy a bank in a British economy that’s “at a cyclical peak,” rather than one supposedly at the start of its recovery. “Why are Spanish banks investing overseas?” he wrote. “Are such moves diversification or a reflection on the outlook for Spain?”

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