`Tremendous Pressure' Seen Prompting Spanish Bank Merger Round

  • Court decision on mortgage floors seen triggering mergers
  • BBVA chairman says will play `relevant' role in consolidation

A second round of mergers and acquisitions awaits Spain’s banking industry, three years after Europe’s debt crisis set off the biggest exodus in the country’s history.

Ultra-low interest rates, weak demand for home loans and growing competition for business credit are eroding returns -- even as Spain’s economy outstrips growth in most developed countries. Elections in December could clear the way for merger talks early next year, with the future of two nationalized banks among the first decisions facing the new government.

Banks in Spain and across Europe are under “tremendous pressure,” Banco Bilbao Vizcaya Argentaria SA Chairman Francisco Gonzalez said at a conference this month. “There will be banking consolidation in Spain” and BBVA will be a “relevant player.” Banco Santander SA’s chief executive officer, Jose Antonio Alvarez, said late last month the lender would study “all options.”

Spain has nine publicly traded banks. Some will probably use the coming round of deals to gain market share, bankers, analysts and investors say. Two, though, are seen as targets -- nationalized lender Bankia SA and Liberbank SA, which last year failed a health-check by European regulators.

Three other mid-size lenders -- with assets of more than 30 billion euros -- are seen as takeover targets or merger partners: Banco Mare Nostrum SA, Ibercaja Banco SA and Unicaja Banco SA. Created from mergers of savings banks, these companies are struggling with lower returns, partly because of their exposure to mortgages.

“It’s a good development,” said Patrick Lemmens, who helps oversee about 10 billion euros ($10.7 billion) in financial-services stocks at Orix Corp.’s Robeco Groep NV in Rotterdam. “If you want to have a healthy economy with healthy availability of credit, you need to have healthy banks and consolidation is an important process which helps establish that." 

More than 20 Spanish lenders have disappeared since 2012, when the country was forced to bail out casualties of its real-estate bust to restore confidence in the government’s own debt. With 41 billion euros in European rescue money, the government set up a ‘bad bank’ to absorb sour property loans and began restructuring some state-aided banks and winding down others beyond repair. The casualties were mainly cajas, savings banks that over-reached during the boom.

“The old situation when you had all these cajas competing with each other outside of their traditional regional market, while making losses didn’t make sense,” Lemmens said. Spain had 46 cajas in December 2009. Today, six years later, it has just two.

In 2012 BBVA acquired Unnim, a group of former cajas that had been seized by the government, for one euro. Earlier this year, it completed the acquisition of Barcelona-based Catalunya Banc SA for about 1.17 billion euros. That lender was nationalized in 2011 and bailed out with 12 billion euros in public funds.

“There will be mergers as it will be the only way to create value,” said Javier Galan, fund manager at Renta 4 Banco SA, a Madrid-based financial services and brokerage firm. He said Santander and BBVA, both companies with a global reach, probably won’t play a very active role to avoid more exposure to their home market.

“What makes more sense is that medium-size banks such as CaixaBank, Banco Sabadell or Banco Popular buy some of the smaller banks,” he said.

December Elections

Two deals -- Bankia and Banco Mare Nostrum -- are already on the list. The government bailed out these nationalized lenders in 2012 and is now looking recoup some of the money. A decision on whether to sell a stake or look for a buyer is expected early next year, after Dec. 20 elections. The current economy minister, Luis de Guindos, has said he would like to see Bankia remain an “independent player.”

Spain’s central bank is pressing for changes, saying this month that banks have to adjust to a “highly demanding” environment. The challenges include post-crisis regulations requiring lenders to hold more capital, record-low interest rates and a feeble housing market.

Those pressures have contributed to a drop in lending, which is weighing on banks’ main source of revenue. Net interest income, the difference between what banks charge for loans and pay on deposits, fell in the third quarter at lenders including Santander and CaixaBank SA.

Mortgage Floors

Another trigger for mergers could be a looming Spanish court ruling on whether to continue to allow banks to set minimum interest rates, or floors, on floating-rate mortgages, the most common Spain. Banks have used floors to buoy returns as official rates tumbled to new lows this year. CaixaBank said in October it’s eliminating floors at an annualized cost of 220 million euros.

Consolidation is also happening internationally. Banco de Sabadell paid 1.7 billion pounds for TSB Banking Group Plc earlier this year.

Not everyone believes tie-ups will improve profitability. Banks should focus on their own business and cut costs and risks to deliver a sustainable return on equity, said Berenberg’s analyst Andrew Lowe. 

“It remains to be seen whether M&A will benefit shareholders, as it brings other risks,” he said. “Spanish banks have problems and I don’t think M&A is necessarily the solution.”

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