It used to be said that Spain’s savings banks, known as cajas de ahorros, posed a threat to the dominant position held by the big commercial banks. That threat is now a reality, at least in the domestic market. As of this year, the country’s 46 cajas now account for 54% of the mortgage market, the banking industry’s key driver of growth, and 56% of total customer deposits.
Even more alarming for the banks, the cajas have started to grab market share in areas that were once the private fiefdom of their giant rivals Grupo Santander and BBVA. The cajas have parted company with the image of the savings bank as a sleepy, conservative institution. Caja Madrid, the second largest after Barcelona-based La Caixa, now ranks first in project finance and credit derivatives and second in loan syndication.
The cajas have outgrown their historical image of stodgy mutual societies specialising in mortgages and personal loans to low income customers. They have become slick operations that are a competitive match for the banks not only in the breadth of their operations, but also in balance sheet strength. The cajas’ capital adequacy ratio now stands at 11.3%, compared with 9.6% for the banking sector. La Caixa and Caja Madrid today rank as Spain’s second and third largest banking groups, respectively. The trend is towards consolidation, which will create larger and more competitive cajas, thus giving the banks a run for their money in key regions.
The affluent and industrial Basque Country is a case in point. The region’s three cajas have agreed to merge early next year, a move that will create Spain’s third largest savings bank by profits. Most analysts expect the merger process to accelerate, which in the end will yield one flagship caja for each of Spain’s 17 semi-autonomous regions.
Corporate muscle
The Spanish savings banks exercise a considerable amount of muscle in the country’s corporate sector. Their portfolio of industrial holdings includes 117 top listed corporates with a collective potential capital gain of more than €16bn. La Caixa and Caja Madrid are now the key players in a heated battle between the country’s two leading utilities, Endesa and Gas Natural. La Caixa’s 35.5% stake in Gas Natural makes it the largest shareholder in the company that has launched a €22.5bn hostile bid for rival Endesa, which could become Europe’s largest M&A deal of the year. Caja Madrid has 9% of defender Endesa.
Expanded horizons
The cajas are challenging the banks abroad as well as in their home market. Caja Madrid recently acquired 25% of Su Casita, Mexico’s second largest mortgage lender, with an option to raise its stake to 40%. “Mexico’s mortgage market is set to register a spectacular level of growth over the next 20 years,” says Carlos Vela, Caja Madrid’s head of investment banking. “This was a unique occasion, since Mexico’s political situation is stable and the country borders the US.
“We are providing Su Casita with technology and our marketing experience. Lower interest rates are going to have a tremendous impact on Mexico’s consumer lending market, which is on the verge of rapid expansion.”
Savings banks like Caja Madrid have been facing ferocious competition in Spain’s mature domestic mortgage market, in which the spread now stands at 0.50% on 35-year loans. Caja Madrid has been growing its mortgage operations by 20% to 25% a year over the past five years and Mr Vela acknowledges that this rate is unsustainable, hence the need to add an international dimension to the business.
It is not only the top-tier cajas that have decided to take the plunge outside their home market. Caja Navarra, a middle-size institution based in the north-eastern city of Pamplona, is an example of a bank with a flair for innovation and an appetite for international expansion. It has launched a joint-venture with Wachovia, the fourth largest US bank, to offer the Spanish group’s corporate customers advisory services and technical support for doing business in the American market.
“Our regional market [Navarre] was starting to feel small and our corporate clients were asking us for help to expand their businesses abroad,” says Carlos Ayesa, Caja Navarra’s deputy managing director. “We responded by drawing up an aggressive expansion plan and the agreement with Wachovia is a key part of this initiative.”
Three years ago Caja Navarra, which accounts for 60% of lending in its home region, decided to push for a larger share of the corporate market against tough competition from giants Santander and BBVA. The plan was to provide personalised logistic and advisory support through a new service called Viálogos. In this period corporate lending grew from 19% to 33% of the loan book, with return on assets up from 0.74% to 1.04%. “Once we had shown our 700 local corporate customers what we could do on a domestic level, we began to receive requests for international services and that’s where the Wachovia deal comes into the picture,” says Mr Ayesa.
“The secret is to listen to your customers. We take on 10 new commitments with our corporate clients every year. Two years ago, they told us that we were too slow in approving loans, so we said that as a first commitment we would reach a decision on all loan applications within 48 hours or pay the customer €100. We are now operating at a 95% success rate.”
On the retail side, Caja Navarra has made a pitch to involve its customers in the bank’s investment strategy. The savings banks donate on average 28% of their net income to charitable causes and are required to assign half their profits to reserves. The retail banks, on the other hand, pay out about 70% of their profit in shareholder dividends, which helps to explain why the cajas have been enjoying a spectacular rate of growth of free capital.
Charitable democracy
Last year, Caja Navarra’s board decided to let its customers decide where to invest its charitable funds, offering a choice of nine sectors. “By next year, the investment strategy of our entire charity budget will be in the hands of our 550,000 customers,” says Mr Ayesa.
“Letting the customer determine where to spend part of the bank’s profits is a unique initiative not only in Spain, but anywhere in the world as far as we are aware. However, our mutual status can never be used as a pretext for running an inefficient business.”
The cajas are on a roll but they may face a threat to their privileged status. The IMF and the Organisation for Economic Co-operation and Development have made recommendations in favour of privatising the cajas. Even the powerful Spanish business organisation Círculo de Empresarios says it is wrong for half of Spain’s financial system to be lacking ownership and to be under the control of political parties.
Local politicians sit on the cajas’ boards and exert considerable influence in channelling funds into their parties’ pet public works projects.
The banks, too, are clamouring for an end to the alleged lack of a level playing field and have taken their case to Brussels. In July, the European Banking Federation issued a report criticising the Spanish anomaly of a group of mutuals that is free to acquire banks, but are immune to takeover by banks.
The cajas have not hesitated to exploit this situation and over the years have acquired several small banks. Analysts say that the privatisation of Caisse Nationale de Caisses d’Epargne, the umbrella organisation of France’s 32 savings banks, could be used by Brussels to bring pressure on the savings banks industry across Europe.
