Liberbank

Merger set to create Spain’s fifth largest bank and follows approval of union between Bankia and CaixaBank.

The consolidation trend in Spain’s banking industry accelerated on December 30 as the boards of Unicaja and Liberbank approved a merger that will create the country’s fifth largest lender.

The deal follows the approval of a tie-up between state-owned Bankia and CaixaBank to create Spain’s largest bank by customer numbers. 

Ultra-low interest rates, the fallout from the Covid-19 pandemic and the challenges of digital transformation have forced many banks to cut costs and regulators are encouraging consolidation in the industry. BBVA and Sabadell called off merger talks last month.

Unicaja will fully absorb Liberbank to create a bank with €110bn in assets. The union will lead to annual cost savings of around €160m by end-2023, which represents around 17% of the banks´ combined cost base, according to DBRS Morningstar.

The transaction will be broadly credit positive for Liberbank as the combined bank will benefit from being part of a stronger and more sizeable franchise,” wrote Pablo Manzano, an analyst at DBRS Morningstar, in a report published January 5.

The merger plan includes significant restructuring costs which should improve the structural weak profitability of Liberbank, Mr Manzano said. “Liberbank will merge with a bank with a similar loan book profile with slightly higher capital ratios,” Mr Manzano wrote.

The transaction will also provide additional impairment charges for non-performing assets (NPAs) and as a result, the new bank will have a lower pro-forma net NPA ratio than that posted by Liberbank at end-September, Mr Manzano said.

Execution risks

According to DBRS Morningstar, the full benefits of the merger are likely to take some time to accrue, and will involve some execution risk.

Unicaja and Liberbank have both been affected by the negative economic environment that has been caused by Covid-19 on the Spanish economy.

As a result, the creditworthiness assessment of the new bank is likely to be driven by the impact of the crisis, which is expected emerge in the coming quarters, Mr Manzano added.

The merged entity will have more than 1500 branches in Spain and a joint workforce of over 9800 employees.

The combined bank aims for a return on tangible equity of around 6% in 2023 and expects to see its profit per share to be 50% higher in 2023 than the market expected.

This reduction is substantial given the low proportion of overlapping branches between Unicaja and Liberbank (less than 20% of Liberbank´s branches were in areas where Unicaja is present as of end-2018), according to DBRS Morningstar.

The shareholders of Unicaja will hold 59.5% of the new group with the remaining 40.5% being held by the shareholders of Liberbank, according to the agreement reached. Unicaja Foundation will remain the reference shareholder of the new bank with around a 30% stake.

The merger will need to be approved by both banks’ shareholder’s meetings, which are expected to take place in March. In addition, the deal is subject to regulatory approvals, including authorisation from the Spanish Competition Authority.

“From a capital perspective, restructuring costs (€500m), additional NPA provisions (€400m) and charges related to the renegotiation of existing commercial partnerships (mainly with insurance companies, of €200m) will have a negative impact on capital ratios of around 250 bps,” Mr Manzano said.

As a result, the new bank’s capital ratio should be about 12.4% after €1.2bn of costs related to the merger, according DBRS Morningstar.

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