Spanish banks were rudely awoken from their summer siesta by news that the much anticipated merger process among the country's 45 cajas, or regional savings and loans mutuals, was suddenly gathering momentum. Consolidation in this highly fragmented sector was not unexpected.
With the rise in non-performing mortgages, the sector's bread-and-butter business, and spiralling corporate failures, a system of fewer and stronger cajas has long been viewed as essential to the health of Spain's financial services industry. The Bank of Spain's restructuring fund, approved in June with an initial €9bn war chest, is also designed to support the restructuring of the cajas. The fund was set up to inject fresh equity into newly merged entities, as well as those deemed able to soldier on alone through the recession.
The cajas are major players in the Spanish market, accounting for 59% of all deposits and 51% of lending. The cajas have parted company with the image of the savings bank as a sleepy, conservative institution. Barcelona's La Caixa and Caja Madrid today rank as Spain's third and fourth largest banking groups, respectively. As mutuals (with the exception of Valencia-based CAM, which has issued non-voting shares), the cajas are immune from hostile takeovers. Yet they can and have been actively expanding by acquiring assets from listed banks.
As an example, before its takeover by Banco Santander, Abbey's Spanish business was sold to CAM; Caja Murcia acquired 13 branches of Banco de Madrid from its parent Deutsche Bank; and several other smaller retail banks have been absorbed by the cajas. But the cajas, which are also principal lenders to the construction sector, have not escaped the fallout from Spain's burst property bubble. Margins are shrinking, profit growth has plummeted from 30% in 2006 to 3% this year, with negative growth forecast for 2010, while bad debts last year rose to 3.68% of the loan book from 0.89% in 2007, according to figures from the cajas' professional association CECA.
"The sector is consolidating now because it's easier to have mergers when times are tough," says Jesús MartÃnez, a Madrid-based analyst at Standard & Poor's. "When profits are strong and on the rise, managers are not interested in merging with other institutions."
Alarm bells
The warning bells sounded last March when Caja Castilla la-Mancha was taken over and recapitalised by the Bank of Spain, to date the only Spanish bank to be bailed out by the state. The decision to intervene came after the caja reported an 87.1% decline in profits for 2008, with a 300% increase in bad debt provisioning. Three months later Spanish economy minister Elena Salgado confirmed the government's intention to allow the bank rescue fund to take stakes in ailing savings banks.
"The fund will allow the state to temporarily buy holdings with voting rights," she said. "This fund would be a last resort. First, we would call on the banks to use private means to boost capital. Failing that, they would need to use the guarantee fund. Only then would public aid be available." Ms Salgado said that no Spanish financial institutions were in immediate need of state help. "Although we don't see any major institution needing restructuring, some resizing at the others is inevitable." Despite Ms Salgado's assurances, some bankers say the Bank of Spain has about 10 cajas under special surveillance.
Elena Salgado, Spanish economy minister
Underpinned by property
Spain's savings banks have been hit hard by the collapse of the property sector after years of intense lending to real estate developers and home buyers. Without access to the equity markets, they are limited in their ability to raise capital. "The current economic crisis is a major factor behind the merger process of the cajas, given that their main business is mortgage lending," says MarÃa José Lockerbie, managing director at Fitch Ratings' financial institutions. "But rationalisation of this sector is not new. Several years ago there were more than 70 cajas in operation and at one point there were more than 100 in the market."
The consolidation of the cajas has grabbed headlines in the past few weeks, with the spotlight on Caixa Catalunya's proposed merger with two other Catalan regional institutions, Caixa Girona and Caixa Tarragona. The merged entity would become a major competitor in the sector, with €80.1bn in assets and a 1755-strong branch network. The six remaining Catalonia region savings banks are widely expected to eventually follow the same route. Three of them - Caixa Terrassa, Caixa Sabadell and Caixa Manlleu - said they had met with the Bank of Spain to propose ways of teaming up, including a possible merger.
Shortly afterwards, the Andalusian cajas Unicaja and Cajasur told the Bank of Spain they needed €990m of liquidity from the fund to successfully complete their merger plan. The tie-up would also involve Caja Jaén, another local player. Andalusia is one of the regions hardest hit by Spain's property crash, with nearly 20% of the estimated 1 million unsold new homes in Spain. The merger will create Spain's sixth largest caja, with €53.1bn in combined assets. Many other cajas, up and down the ranking, have said they intend to get involved in the merger process.
A leaner network of cajas operating in Spain does not necessarily pose a threat to the dominant position of the two big retail banks, Santander and BBVA, which have managed to steadily increase market share throughout the gradual reshaping of the cajas over the past 20 years. "The level of competition is very high in Spain and the banks are used to the challenges posed by the cajas, says Fitch Ratings' Ms Lockerbie. "For many years the cajas have been the main competitors for Santander and BBVA in each region. The merger process is not likely to result in the loss of much market share for the banks."
Banks and politics
Local authorities have a strong presence on the boards of the cajas, a factor that complicates potential mergers between the regionally focused institutions. This is a major obstacle to mergers both within and between regions, since two cajas that might be considered a natural fit may be under the control of rival political parties. This was one of the reasons for the failure earlier this year to bring off a proposed merger between the powerful cajas of the Basque region.
The International Monetary Fund and the Organisation for Economic Co-operation and Development have made recommendations in favour of privatising the sector and even the powerful Spanish business confederation CÃrculo de Empresarios says it is wrong for "half of Spain's financial system to be lacking ownership and under the control of political parties".
There are strong voices within the sector in favour of further streamlining, despite the political hurdles. Juan Ramón Quintás, chairman of CECA, says that mergers that reflect political interests have either been stillborn or have proved difficult to digest.
"I have always maintained that mergers based on sound business principals of rationalisation have always yielded extraordinary results," he says. "I am always in favour of the latter. Therefore I would like to see the elimination of those artificial factors that hamper a good merger." Mr Quintás says that mergers should be a vehicle to achieve cost savings or rationalise IT systems, but that they should never be considered an end in themselves, "since size is no guarantee of success".
Juan Ramón Quintás, chairman of CECA
Growth over size
This is reflected in the position of some of the tightly managed smaller cajas, such as Caja Navarra, which last year was able to grow its loan portfolio by 9% while holding its non-performing loan ratio to 1.93%, roughly half the sector average. Caja Navarra is also an example of the sector's determination to operate along the same lines as the retail banks, including seeking growth opportunities abroad. This medium-size entity, with net profits of €161.5m, has tapped into the eastern European market with joint ventures with Alpha Bank in Romania and Nordea Bank in Poland.
So far the two big cajas, La Caixa and Caja Madrid, have remained on the sidelines. La Caixa's director-general, Juan MarÃa Nin, has rejected any suggestions of the bank taking part in future mergers. "We're not going to get involved in this as our focus is on international expansion," he says.
Fitch's Ms Lockerbie says that La Caixa has already expanded across Spain and has acquired banks and branch networks outside Catalonia. "In this kind of process it is usually the very large cajas that take over smaller ones, so one cannot rule out La Caixa taking part in the process," she says. "Caja Madrid is not as broadly present in all areas. If it sees an opportunity to fill in gaps to achieve cost synergies and more muscle to weather the crisis, it's not inconceivable for Caja Madrid to get involved in the merger process."
Caja Madrid has not ruled out growth through acquisition and Mr MartÃnez of Standard & Poor's believes that Spain's second biggest caja remains open to mergers. There has recently been a flurry of speculation about approaches to several smaller banks, which so far Caja Madrid has declined to confirm. "In any event, there is going to be a major shake-up in the Spanish financial system in the next year or so," Mr MartÃnez predicts. "What we are seeing now is just the beginning."
Spain's biggest cajas by assets
