Spain’s savings banks are feeling the pinch of a slowing economy combined with the liability of their huge mortgage portfolios. Rodrigo Amaral reports.
After years of strong growth and business expansion, Spain’s mutual saving banks (cajas de ahorro) face a challenging future in a very competitive market as the Spanish economy slows down. With one of their main business lines, the provision of mortgage loans in deep trouble, the buzzword among the cajas is to diversify to ride out the storm.
The cajas have been feeling the pinch of an economy that has moved swiftly from posting some the fastest rates of growth in the EU to becoming one of the bloc’s most sluggish laggards. Earnings in the first quarter reflected the uncertainties facing the sector. As a whole in Q1, the cajas posted a paltry 0.2% increase in net profits, a far cry from the 19.2% posted in the whole of 2007.
The numbers could have been better if the cajas had not decided to increase their provisions sharply to pump up a safety cushion for the future. Net profits would have grown a respectable 12.7% in the period but for the putting of more than €400m in voluntary provisions, according to José António Olavarrieta, the general director of CECA, the Spanish association of saving banks.
No more easy money
The times when making money was almost easy look well and truly over. “We are entering a period of lower rates of growth and more expensive money,” says Amado Franco, the chairman of Zaragoza-based Ibercaja, in an interview in Madrid. The main cause for concern is the dramatic burst of a long-running property bubble that has driven much of Spain’s growth in the past decade, feeding the profits of financial groups in the process.
A study by Instituto Juan de Mariana, a think tank, estimated that savings banks have a portfolio of almost €600bn in mortgage loans. It pointed out that total loans represented seven times the capital of savings banks, against less than four times for commercial banks. “Mutual savings banks suffer from a clear lack of capital to face an eventual increase of arrears and default rates,” the study said. “They are in a very fragile situation to face the economic crisis.”
The cajas contest this view and strive to point out that several shades of grey can be found in their mortgage business. In a recent speech in Madrid, the chairman of Vigo-based Caixanova, Julio Fernández Gayoso, said that the volume of mortgage loans owned by the cajas amounted to 70% of the value of the properties that they helped to acquire.
Mr Olavarrieta says he recognises that arrears are on the way up but, even after a sharp increase in the past few months, remain at 1.2%, a reasonable ratio – although much larger than at commercial banks. CECA forecasts that arrears may reach up to 3% in the forthcoming months. “But even then, it will be much lower than the 9% we observed during the 1990s,” says Mr Olavarrieta.
Damaged image
Mr Franco believes that the Spanish financial sector has been unable to drum up its strengths, which has helped to undermine the image of banks and cajas. The mortgage market is a case in point, he says. “The Spanish mortgage loan has nothing to do with the American or British mortgage loan. Here, if the value of the property is not enough to cover the debt, the creditor can go after other assets belonging to the debtor to recover the money,” he says.
The bottom line, according to this view, is that no caja has a mortgage business as risky as that of Northern Rock in the UK or Countrywide in the US. Nonetheless, the all too cautious Bank of Spain has expressed concern about mortgage portfolios, and virtually every caja has been at pains recently to stress that its exposure to mortgage loans is not excessively high.
Drive for diversity
The change of economic conditions is set to add extra drive to a process of business diversification that many cajas started some time ago. “The model of relationship with our clients is changing,” says Juan Oderiz, deputy chairman of Pamplona-based Caja Navarra. “If, some time ago, savings banks would cement their relationship with clients on a mortgage loan, now this model is disappearing.”
The strategy of growing by opening new branches may also be reaching a limit. Last year, the cajas inaugurated more than 1000 branches in Spain, which was twice as many as commercial banks. By the end of last year, they had 24,637 branches in the country, against 15,578 branches for the other banks. Some have carried on strongly this year: Caixanova, for instance, opened 25 new branches in the first five months of the year, taking its total to 566.
However, the trend may not last much longer. Mr Franco says that he believes there will be a period of branch rationalisation, which does not necessarily imply the closing of units, something that is not as simple as it sounds. Ibercaja has more than 1080 branches around the country, but more than 200 of them are one-man or even less than one-man operations (with a single employee taking care of the business of more than one branch) says Mr Franco. Such tiny operations service small or isolated villages and their closing might be a politically sensitive. Not least because the cajas like to justify their ownership arrangements, which prevent them from being taken over by other banks, with the argument that they have a mission to take banking services to every single Spaniard.
Mr Franco denies that small branches act as drains on good money. “The money you invest in those branches, you could get better short-term returns for it,” he concedes. “But they don’t lose money and give better publicity for our brand than television ads.”
New business lines
The search for variety for the cajas means making inroads in business areas where they are not traditionally strong players and expanding beyond the Spanish borders, according to Braulio Medel, the chairman of Malaga-based Unicaja. Answering to a questionnaire sent by e-mail, Mr Medel outlined the several roads that, in his view, cajas can follow to achieve their goal of reducing their exposure to a few areas of retail banking:
- Geographic expansion in their original regions, to other parts of Spain and abroad;
- Looking for new kinds of clients, mainly companies, government bodies and immigrants;
- Investing in new business lines, such as consumer credit and private banking;
- Offering new products, such as investment funds and insurance;
- Seeking opportunities in areas, such as agriculture, tourism and services;
- Enhancing the use of channels, such as the internet and specialised branches.
“Diversification is a fundamental strategic choice for any financial organisation today,” said Mr Medel. “But it must be engaged with a necessary dose of caution, after a careful analysis of new initiatives and of the company’s ability to carry such plans forward.”
For many cajas, the process is already up and running. Caja Madrid, for example, invested $927m last April to acquire an 83% stake at Florida’s City National Bank – following in the footsteps of banks such as BBVA and Banco Sabadell that have been taking advantage of the weakness of the dollar compared with the euro to create a stronger presence in the US market. Often less ambitiously, many of its peers are doing the same.
“Clients are much more internationalised than the cajas,” says Mr Oderiz. Caja Navarra, he says, saw a growing desire among its corporate clients for help with their business abroad and, as a result, has decided to open branches in some countries and sign agreements with banks in others.
The cajas boast a proud record of working with local businesses, and small and medium-sized enterprises (SMEs) provide them with the main focus of expansion at home, according to Mr Franco. He notes that Ibercaja has grown its credits conceded to SMEs by 23% to 24% a year.
And Mr Oderiz says that Caja Navarra’s dealings with non-property companies has doubled in four years, to a great extent due to a programme in which clients are continually asked about their needs. About 7000 business people have taken part in 22 programme sessions so far, he claims, and the feedback obtained has persuaded Caja Navarra to boost other services, such as investment banking and wealth management, to offer what those clients want.
Private banking
Wealth management, a business that has proved remarkably reliable in the current market turmoil, is an area that seems to be attracting a growing number of cajas too. Some analysts believe that cajas, with their close links to local business people, particularly SME owners, have a natural advantage in trust-based activities such as private banking. Following this reasoning, the largest caja, Barcelona-based La Caixa, has boosted its private banking business with the recent purchase of Morgan Stanley’s Spanish-based wealth management unit.
At the beginning of the year, BBK, a caja based in the Basque country, took its first steps into the private banking market with the purchase of a controlling stake at Grupo Fineco, a Bilbao-based wealth management group. And Valencia-based Bancaja has recently raided Banco Urquijo, a traditional private bank acquired by Banco Sabadell in 2006, to secure the services of several top bankers for its newly created wealth management unit, Invercalia.
Ferocious retail market
Some cajas are going to some lengths to attract new retail banking clients in a ferocious market where current account deposits pay interests that are so competitive that they have been considered partly responsible for an outflow of money from investment funds. Caja Madrid, for instance, grabbed a net flow of €4bn in three months into its Relájate y Disfruta account, which, among other features, offered depositors the opportunity to win a flat by lottery.
Caja Navarra has been betting on the concept of civic banking, allowing clients to have a say, for instance, on the fate of the share of profits that the cajas are forced by law to invest in social works. The discourse is about democracy and participation rights but the civic banking activity is not doing any harm to the firm’s client base either. “Last year, our number of clients increased 18.7%, which was more than double our closest competitors,” Mr Oderiz remarks.
The search for money
To carry on their diversification plans, the cajas need to find more money, which is not easy in times of global financial crisis. They have been putting their best brains to work to find a way to fill the gap. La Caixa, which wants to increase its international presence, has gathered its stakes in some of the jewels of the Spanish corporate world into a single industrial holding, Criteria, which was floated on the Madrid stock exchange last year, bringing in €3.5bn for new investments. Less spectacularly, La Coruña-based Caixa Galícia decided to sell 40 of its branches to a Spanish businessman, in a lease-back agreement that brought in €250m of immediate liquidity.
In a more daring move, Alicante-based Caja Mediterráneo (CAM) has confirmed that it will be the first caja to issue non-voting shares that will be sold on the stock exchange. The operation, which has been mooted by several cajas but generates controversy because it is sometimes regarded as privatisation by stealth, is aimed at funding projects such as the development of international operations.
CAM has also claimed that it will increase transparency and put its own performance under the judgement of the market. “We have opened a road that will allow us to compete as equals with other financial groups,” said CEO Roberto López Abad at the announcement of the operation. “Now we will be able to go to the markets to strengthen our own resources when we think there is an opportunity to develop the projects explained in our business plan.”
The share issue, expected to take place some time this year, will be closely monitored by other cajas, although it raises a few eyebrows among them. “We don’t plan to use cuotas participativas for two reasons,” says Mr Franco. “First, we don’t need to raise more funds. Second, because it is a more expensive tool, as its tax treatment is the same of that of dividends.” However, he says that any successful tool to raise funds in a difficult market probably deserves a good look.
The cajas have made efforts to stress that they are not under imminent threat by the current financial crisis, although they suffer, similarly to any other institution, from the lack of liquidity in global markets. “The sector is well prepared to face difficult times thanks to something that used to make us really angry: the insistence of the Bank of Spain on making provisions when the times were good,” says Mr Olavarrieta.
Troubles overstated?
Mr Franco believes that views that Spanish banks and cajas are in trouble are another symptom of the lack of knowledge about them outside Spain. For example, he rejects any comparison of the Spanish cajas with their German peers, the troubled Landesbanken, some of which have been among the main victims of the subprime crisis. The cajas are much less exposed to collateralised debt obligations and other exotic products, he says, because they were lucky with market conditions in previous years.
“The Germans had too much liquidity and few investment opportunities inside Germany, which were growing very slowly, so they went for financial vehicles that we now know are contaminated. In Spain, rapid economic growth for several years meant that we couldn’t raise as much money as we needed to meet demand for investments. So we avoided the temptation to do the same,” says Mr Franco.
