Founded in 1702 by a priest, Father Piquer, Caja Madrid is Spain’s oldest financial institution. Its original mission was to get money from the rich and give it to the poor, which it did by Father Piquer selling the jewellery and other valuable goods donated to him and distributing the proceeds to the needy. As a savings bank, Caja Madrid’s mandate remains much the same to this day: it generally donates about 25% of post-tax profits towards social welfare projects. In 2002, this amounted to E130m.
Successful defence
Spain’s savings banks have been very successful in defending their share of domestic retail business against the incursion of commercial banks that entered the retail arena when the financial markets were deregulated in 1977. As a group, the cajas’ share of Spanish deposit taking and mortgage lending stands at about 51%. Mortgages make up more than 60% of the savings banks’ loan portfolio. While deposit streams have remained relatively stable, in Spain as elsewhere, consumers are generally shifting from deposits to investment funds and other savings vehicles – so most cajas are increasingly turning to the capital markets for refinancing.
Different tools
Caja Madrid, which is one of the country’s two largest savings banks, uses a variety of funding tools. In the domestic retail sector, it raises E1bn–E1.5bn per year through structured issuance – mainly capital guarantee products that are distributed via its large retail network.
The bank’s Netherlands-based medium-term note programme, Madrid Finance BV, raises about E5bn per year, and mainly uses an opportunistic strategy, says Mr Stilianopoulos. All the notes are placed with international investors, such as pension funds, insurance companies and high net worth individuals. Most of the issuance is short-dated – averaging 18 months and one day – which is just long enough for them to be counted towards league table positions. “The transactions are ideally suited to the lead managers’ league table purposes and we get very competitive pricing in return,” he says.
By comparison, the issuance of cedulas hipotecarias (Spanish covered bonds backed by retail and commercial mortgages) is a pure, long-term funding strategy for Caja Madrid. The bank carries out one or two benchmark issues per year and, since the first Spanish issue in 1999, has steadily built a yield curve ranging from 5–15 years. In 2004, Mr Stilianopoulos expects the bank to raise about E2.5bn. This compares to E1.9bn raised in 2003. Together with other Spanish banks, Caja Madrid also securitises covered bonds through a platform called TdA, in which it joins with other participating banks, the number of which varies from issue to issue. Last year, E0.4bn of funds raised were carried out via this platform. In 2004, Mr Stilianopoulos expects that there will be three or four issues raising up to E10bn collectively.
The strategy behind Caja Madrid’s part in TdA transactions goes beyond sourcing funding, however. With TdA, Caja Madrid acts as issuer, arranger and lead manager on deals where approximately 10% of the transaction may be the bank’s. It is through this combined role, says Mr Stilianopoulos, that the bank is able to build its profile and gain access to other deal flows.
Working together
“TdA transactions enable us to work together with a lot of the smaller Spanish savings banks that would not otherwise be able to tap the capital markets,” he says. “We can offer them our experience in capital markets issuance. It also brings us other deal flows in different products from participating banks.
Spanish covered bonds have good reason to be confident as they are increasingly giving European competitors a run for their money. They are seeing broader investor interest across Europe and elsewhere; Caja Madrid has already placed bonds with Middle East investors, for example: of the last issue in 2003, about 5% of E1.5bn went to investors there.
Expansion ahead
Caja Madrid is now looking to expand its horizons even further. At the beginning of December 2003, it undertook a roadshow of seven Asian countries, focusing on the countries’ central banks. “[They] are buying other covered bonds, so our aim is to introduce them to cedulas hipotecarias,” he says.
It is not a matter of pitching cedulas against other players in the covered bond market, such as the German Pfandebriefe, Mr Stilianopoulos says, but a question of educating investors about the Spanish product. The proof of Spanish issuers’ success can be found in the spectacular growth of the market. There were only two Spanish issues in 1999, but by the end of 2003, the total outstanding size of the market was E50bn, with E30bn issued during 2003 – a rise of about 90% on 2002 figures.
“When the market first started in 1999, it was very difficult to get investors to buy non-Pfandebriefe products,” says Mr Stilianopoulos. “The fact that we can now place so much paper shows how much investors understand and like the product.”
Gaining ground
Mr Stilianopoulos believes that Spanish bonds are quickly gaining ground against more established competitors; Pfandebriefe, for example, while still the biggest player in the European covered bond market, are facing increasing challenges from other European issuers. “It’s not that they are getting worse, just that the competition is getting better.”
But he says competition can only be a good thing – at home as well as abroad. The domestic Spanish market boasts multiple issuers and this has helped to drive the product forward. “If we had only had one or two issuers, it would have been much more difficult to open up and develop the market. Now vigorous domestic competition creates much greater liquidity for the Spanish product and ensures tighter pricing for investors.”
The Spanish jumbo market has grown significantly in the past two years, and regular benchmark issues have deepened liquidity. To date, nine issuers have 31 jumbo cedulas outstanding, with an aggregate volume of more than E50bn. Two banks, Caja Madrid and BBVA, have been pioneers in the market since 1999 and have made a major contribution to the dynamic growth of this sector.
New contender
In September 2003, however, a new Spanish contender arrived on the jumbo covered bond scene: cedulas territoriales, which are covered bonds backed by loans to the state sector. French covered bonds, obligations foncieres, and German Pfandebriefe are backed by public sector loans as well as mortgages, but in Spain, the law restricts cedulas hipotecarias’ asset pool to residential and commercial mortgages. Many banks, therefore, see territoriales as a good vehicle for securitising a broader range of bank assets and satisfying jumbo conventions.
For such a key player in the Spanish covered bond market, Caja Madrid has been conspicuous by its absence from the group of banks issuing together on the Ahorro y Titulizacion platform. Mr Stilianopoulos says that as Caja Madrid only has the room to issue about E1bn in territoriales, it will probably not enter the market. Lack of eligible assets will prevent territoriales from developing into the same liquid market as the hipotecarias, he says.
“Territoriales will never become as big a market as the hipotecarias because the underlying asset pool is too small. German banks were very big lenders to the Spanish public sector during the 1990s, while Spanish banks didn’t participate to a great degree, so basically there is very little collateral. For territoriales, there is a maximum issuance of about E10bn. As the mortgage market grows by about 20% per year, loans to the public sector are diminishing – driven by EU directives aimed at reducing public expenditure.”
Potential for growth
Mr Stilianopoulos is very positive about the potential for cedulas hipotecarias. By law, Spanish banks are allowed to issue cedulas against 90% of their eligible mortgage book, which affords Caja Madrid considerable leeway. “With the outstanding mortgages we already have in the Spanish market, we could issue E130bn of new cedulas. The total size of the outstanding market is about E50bn, so the growth potential is phenomenal even if no new mortgages were given in the next few years,” he says.
Clearly, his market prognosis is based on the growth of the Spanish mortgage market, which he says is growing by about 20% per year on the back of the country’s housing boom. Mr Stilianopoulos doesn’t see why this should slow too much in the near future and dismisses the idea of a housing bubble.
“The idea has been raised in Spain, but most people in the financial sector and the government do not believe it really exists. Unlike the rest of Europe, Spain’s economy has continued to grow by around 2%-3% per year, so the housing market has fairly solid foundations,” he says.
