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WorldAugust 1 2014

CaixaBank's simple steps to success

CaixaBank has emerged from the Spanish banking crisis with a larger share of the domestic market and the biggest branch network in the country. By focusing exclusively on its home market, and continuing its trend of innovation, the lender hopes to build on this position.
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​In terms of winners and losers from the Spanish banking crisis, CaixaBank falls into the former category. Before the crisis the bank trailed BBVA and Santander in terms of market shares in loans and deposits. Now, it is the largest bank in Spain by these measures, with a 15% share in loans, 14.4% share in deposits and 20% share in pensions, credit cards and life assurance. It has the largest branch network, with 5700 outlets, as well as a commanding 30% share of the online market.

All these achievements were completed in spite of running into similar kinds of heavy real estate and other losses as other Spanish banks during the crisis. Analysts say that good risk and credit management skills mitigated these losses, but the fact remains that the bank was able to use the crisis to its best advantage at a time when the outlook was highly uncertain.

The acquisitions of troubled Spanish lender Banco de Valencia and savings bank group Banca Civica in 2012 presented a challenge that tested CaixaBank’s integration skills, but has eventually resulted in impressive 50% cost savings in the merged entities.

Time of change

The Caixa group has been completely restructured, and its banking assets listed, to create a more rational model that can be better understood by both regulators and investors. There has been a strong focus on technology and innovation as a way of delivering a better product, more efficiently.

In June 2014, the restructuring moved towards completion when savings bank La Caixa was converted into a banking foundation. The next move will be for it to transfer its stake in CaixaBank to Criteria CaixaHolding, the Caixa group’s investment company, in which La Caixa owns a 100% stake. This is intended to make it more transparent regarding which activities are done where: welfare, La Caixa; investment, Criteria; banking, CaixaBank (see chart below).

La Caixa reorganisation

Fitch’s lead Spanish banking analyst, Josep Colomer, explains: “In the past, some of Spain’s savings banks were subject to some degree of political interference from their governing bodies; the idea [of new legislation introduced in Spain] is to prevent these situations from happening and to improve these institutions’ overall corporate governance.” However, Mr Colomer adds: “La Caixa has been a case where governance has not been a drag on its credit profile.” 

CaixaBank’s incumbent CEO and deputy chairman, Juan Maria Nin, chose this final part of the restructuring as the appropriate moment to resign and hand over to Gonzalo Gortázar, previously the managing director for finance. Mr Nin had overseen both the flotation of Criteria (2007) and CaixaBank (2011), as well as the mergers, efforts to improve the bank’s balance sheet and moves to comply with Basel III.

Now it falls to Mr Gortázar to take the bank forward. He spent 16 years at Morgan Stanley in London and Madrid, finally leading the company’s European financial institutions group until mid-2009, when he joined Criteria.

Maintaining a balance

In his first interview since taking on the new role, Mr Gortázar outlines the key parts of his strategy, such as continuing to work off the effects of the crisis from the balance sheet; improving the cost of funding; building on the bank’s track record for technological innovation; setting and achieving new profits targets as well as looking at further acquisitions.

“There are a number of priorities for us,” says Mr Gortázar. “The first one is dealing with the last legs of the crisis. We want to normalise the balance sheet and we want to normalise funding costs. Normalising the balance sheet means continuing to bring down the level of non-performing loans [NPLs] and foreclosed assets.”

According toThe Banker’s Top 1000 World Banks ranking, which was published in the July issue of the magazine, the bank has 11.7% of NPLs to total loans, but with a high 61% coverage ratio. Furthermore, 24% of NPLs are actually performing and consist of successful restructurings as well as credits that are categorised as NPLs only because they might run into difficulties in future.

“Asset quality should further be helped by the bank’s efforts to reduce risk appetite, mainly through a gradual reduction in its exposure to real estate developers, although this still represents almost 15% of gross loans and foreclosures,” stated report by ratings agency Fitch, published in July, which confirmed an upgrade of the bank’s outlook from negative to positive.

According to a report by ratings agency Standard & Poor’s, which was released in April: “CaixaBank’s focused management team and its demonstrated capacity to consistently implement strategic plans and achieve targets support its creditworthiness.” At the same time, the agency assessed the bank’s capital and earnings as “weak” due to the “still difficult economic conditions in Spain” and “the comparatively higher risk weighting we apply to the bank’s Spanish exposures under our risk adjusted capital framework”.

The bank’s BIS ratio is 17.9% and its capital assets ratio 5.05%, according to The Banker’s Top 1000. It lost Ä713m in 2013 and Ä62m in 2012, but notched up a Ä150m profit in the first quarter of 2014.

Mr Gortázar emphasises that improving profitability depends on improving the cost of funding. “The second priority is normalising the cost of funding, which means bringing down the cost of retail deposits.” He says that eliminating the gap of 100 basis points between the back book and the front book for Ä80bn of time deposits would send Ä800m directly to the bottom line.

Defeating its rivals

The acquisitions of Banca Civica and Banco de Valencia in 2012 have hugely improved the scope for deposit gathering by giving CaixaBank the largest branch network in Spain. Civica was formed in 2010 from regional savings banks Caja Navarra, Cajasol, Caja Canarias and Caja de Burgos and was bought by Caixa in an all-share deal at 11% below the final closing Civica share price.

Nationalised Banco de Valencia was bought for the nominal fee of Ä1, with Spain’s restructuring fund FROB assuming losses of up to 72.5% in certain assets for 10 years. These acquisitions have put CaixaBank in pole position in Spain.

Back in 2009, CaixaBank’s share of both Spanish loans and deposits was 10% – less than Santander’s and less than BBVA in terms of loans. By 2013, the bank was larger than its two main rivals on these measures and it had a larger branch network. It has 13.6 million customers and one in five Spaniards have their main banking relationship with Caixa. It has also made great strides in internet banking.

“We are the largest bank in the traditional world [of Spanish branch banking] but we are even larger in the new world [of the internet],” says Mr Gortázar. “We want to continue to be at the forefront of innovation, which has been difficult [for the industry as a whole] over the past few years, when everyone has been focused on the crisis.” As an example of the bank’s innovation, its Bolsa Bierta smartwatch app won the delivery channels category in The Banker’s Technology Projects of the Year 2014 awards (see page 22).

Of Caixa’s ambitions, Mr Gortázar says: “In our last strategic plan in 2011 we set a target to move from 10% [of the Spanish banking market] to 15%, and we have delivered on that. The rationale is fairly simple: scale in a contacting market, such as the Spanish banking industry, is critical, and to combine scale with simplicity is key. We want to be big, but big in a single market [Spain], employing a well understood universal banking model where we have full command of our operations and where complexity is not a factor.”

CaixaBank does have international shareholdings, which were made before the crisis with the aim of making money and learning through partnerships rather than entering markets on its own. This way it holds 9.1% of Austria’s Erste Bank, 46.2% of Portugal’s BPI, 20.7% of Société Générale’s online savings vehicle Boursorama, 17% of Hong Kong’s Bank of East Asia and 9% of Mexico’s Inbursa. The stake in Inbursa has been reduced to help with capital treatment.

Given Mr Gortázar’s view on the importance of size, will CaixaBank be making further acquisitions in Spain under his stewardship?

“The Spanish banking market will still consolidate in my view. We have the capital, the liquidity and the balance sheet strength to do more acquisitions and we have the ability to deliver a high level of cost savings. In the past two acquisitions, the cost savings we have extracted have been more than 50% of the cost base of what we acquired,” he says.

“This is our core market, we have capital, we like scale and we have the ability to deliver cost savings, so it makes sense for us to look for opportunities. But at the same time, we will be cautious. Banks are highly leveraged and after a crisis you have to be careful [with acquisitions] as their balance sheets will still contain impaired assets. We need to make sure we put all that into the equation before moving ahead.” 

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