Once considered one of the better-placed survivors of the financial crisis, the property bubble bursting in Spain has hit the country's savings banks hard, resulting in calls for consolidation in the sector. Writer Rodrigo Amaral

Cajasur, a regional lender based in Cordoba, had to be rescued by the Banco de España in May, highlighting the difficulties of the Spanish mutual savings bank sector.

After being held up as one of the countries that got banking regulation right, and having sailed through the first round of the financial crisis in good shape, Spain is now coming to terms with domestic challenges in the form of a property collapse.

During a long period of fast economic growth, Spaniards had not foreseen that an economy based on a property bubble was set for a hard landing and that challenges lay ahead for financial firms that had embarked too eagerly on a policy of lending to anything connected with the property market.

The economic downturn that has hit Spain so hard since 2008 has been particularly nasty for some of the country's 45 mutual savings banks (cajas de ahorro), which account for about 50% of Spain's banking sector. With unemployment breaching 20%, many Spaniards have found it harder to pay their debts. Worse has been the situation for property developers and construction companies, which have seen demand for new homes fall off sharply.

The subsequent swelling of non-performing loan (NPL) ratios has forced banks to dig into their profits to increase legally required precautionary provisions. For the largest banks, such as Banco Santander, BBVA and La Caixa, this development has meant that their earnings statements might look less bright than previously. But smaller firms, especially the least capitalised among the cajas, have seen their capital levels deteriorate dramatically. Banco de España (BDE), the country's central bank, has had to intervene to rescue two of the cajas: Caja Castilla La Mancha last year and Cajasur in May.

Raising alarm

The demise of Cajasur, a regional lender based in Cordoba, a city with a population of 325,000 in the south of the country, raised the level of alarm concerning Spanish banks to new levels on the international markets. After providing €3.7bn in loans to property developers, Cajasur accumulated almost €600m of losses in 2009, a year when NPLs reached 8.29%, noted Deloitte, which audited its books. Cajasur's full name is Caja de Ahorros y Monte de Piedad de Cordoba.

The central bank demands that banks maintain capital ratios of at least 8% but Cajasur's reached as low as 3.67%. As bad as the situation was, Cajasur should be viewed within a wider context: the bank represents a mere 0.6% of the assets held by the Spanish banking system. But its situation served as a stark reminder that plenty of other cajas were facing similar problems, although not on the same scale. The Bank of Spain's governor said in June that it had carried out stress tests on the bank, which showed that it had sufficient capital to support even adverse growth scenarios.

"It is the private sector, and not the government, that has a huge debt problem in Spain," says Joaquín Maudos, a banking expert at Instituto Valenciano de Investigaciones Económicas, a Valencia-based research institute. "And about 60% of the debt is linked to the property sector."

Mr Maudos says loans to property developers, construction companies and homebuyers combined amount to €1500bn, or 105% of the Spanish gross domestic product (GDP). While NPLs amount to about 5% of total loans of all types, for property-related loans they reach as high as 10%, he adds.

Both commercial banks and savings banks were active in the property market during the boom, but the latter appear to have been the most extravagant lenders. Since last year, the market has widely assumed that the situation of some cajas was untenable and that they needed to strengthen their capital positions by means of mergers or acquisitions.

However, due to political involvement in their administration, many cajas seemed to be wishing that their problems would simply go away, avoiding the need to take drastic measures. The opposite has happened: Spain's banking sector found itself under renewed pressure this year, courtesy of the ongoing debt drama evolving in Greece and across the eurozone.

"Concerns related to European sovereign risk have fed concerns about European banks that own sovereign debt on their balance sheets. As a result, the situation is clearly more negative now than at the beginning of the year," says Miguel Martín, the chairman of Asociación Española de Banca, the Spanish association of commercial banks. As a result, hopes that economic recovery would rescue the cajas failed to materialise. The Cajasur crisis marked an escalation of the cajas' problems.

Structural problems

In the view of some experts, the very structure of the cajas, many of which are controlled by political groups, prevented them from making hard business decisions if these would threaten the special interests represented on their boards.

One banker has noted privately that Cajasur seemed to operate in an "other-worldly" way, in a reference to the fact that it was controlled by the church and that its chairman and main officials were Catholic priests. The cajas' unresponsive ways have even created rare common ground between Spain's prime minister, José Luis Rodriguez Zapatero, and the leader of the opposition, Mariano Rajoy, bitter rivals who nonetheless agreed in early May to pass through parliament a bill that would change the law on savings banks.

The BDE has tried to push savings banks towards mergers with a €99bn programme, the Fondo de Reestructuración Ordenada Bancaria (FROB), designed to provide capital for banks that find partners to help them strengthen their capital levels.

This package is open to all Spanish banks, but it has been widely assumed that the cajas have always been the main target. The FROB was employed to recapitalise Cajasur after its nationalisation, so that it can carry on working while a new partner is sought. It is likely that another caja will be chosen to take on Cajasur, but new ground might be broken if a non-mutual bank ends up absorbing it; Banco Sabadell, a mid-sized outfit, has been reported to be interested.

The Cajasur episode caused quite a stir in the market. "The central bank is working within the legal limits of its remit and the Spanish legal framework is complicated, because this is a very decentralised state," explains Emilio Ontiveros, a seasoned market observer who is a partner at Analista Financieros Internationales, a Madrid-based financial consultancy. "Regional governments have much to say about the future of the cajas."

Unwanted assets

The BDE's latest measure was an order to accelerate the incorporation of distressed property assets into balance sheets. As a result of the inability of developers and homebuyers to pay their debts, banks have ended up owning billions of euros worth of assets such as flats and parcels of land.

The central bank stresses that the banking system is capable of absorbing a devaluation of up to 50% in property assets thanks to the provisions that banks have already made. In any case, banks have been trying to get rid of their unwanted property assets as fast as they can. For instance, Bancaja, a Valencia-based savings banks, has created a mortgage with a three-year payment holiday for those willing to take one of the repossessed homes it now owns.

As the acceleration of provisions will further erode the profits of the cajas, this may be the final push to accelerate a first round of consolidation among them. Experts have forecast that, in the next few months, the 45 existing cajas will be trimmed down to fewer than 24. A second round of mergers could take place at a later stage, bringing the total down to about 15, according to estimates.

Some of the cajas have already decided simply to merge their operations, such as Caixa Galicia and Caixanova, both based in Galicia province, and Caixa Catalunya, Caixa Tarragona and Caixa Manresa, all in Catalonia. Caja Mediterraneo (CAM), a lender that has its headquarters in Andalusia, is leading a multi-regional merger with four other entities. Others have opted for a sistema institucional de protección, a type of merger where each participant keeps its boards, brands and branch networks, while joining up their capital and balance sheets in a separate bank.

Even the two biggest fish in the pond, La Caixa and Caja Madrid, have embarked on separate mergers, although the operations look more like acquisitions due to the difference in size between them and the other participants. Operations that get the green light from the central bank can be funded with FROB money, which involves an annual interest charge of 7.75% and repayment within five years. The money also comes with some conditions attached, including the closing of branches.

The central bank is thus trying to address another problem faced by the banking system - a surplus of branches. "The provision of banking services was designed for a situation of rapid economic growth," says Mr Ontiveros. Experts believe that, of Spain's 44,000 banking branches, some 12,000 are surplus to demand. But fewer than 2000 closed their doors in 2008 and 2009.


Cajasur, a regional lender based in Cordoba, had to be rescued by the Banco de España in May, highlighting the difficulties of the Spanish mutual savings bank sector

Closing branches

Shutting bank branches is a sensitive matter because of the redundancies it causes in a country where unemployment is already high, and also because it would probably mean the interruption of services for isolated rural communities. Somehow, however, the trimming will have to come, says Mr Maudos. "Spain has one bank branch for every 1000 inhabitants. In the eurozone, the average ratio is one for every 1700. When there was a high demand for loans, this was not a problem. Now it is."

Challenges for the banking system do not stop there. They must also find ways to access new sources of funding as, during the boom years, both banks and cajas became very dependent on the interbank markets to compensate for Spaniards' low levels of savings. The global financial crisis cut this tap for some months and, with concerns about Spain's fiscal position, access to interbank money is again in jeopardy.

Reining in spending

Fortunately, Spanish consumers, fearing a long economic crisis, have begun to rein in their spending, and savings rates have increased from 11% of GDP before the crisis to almost 25%, according to the Spanish business college Esade. In order to profit from this new trend, banks have engaged in a 'war for deposits' in which savers have been offered rates of up to 4% a year, in a tactic that some executives have described as 'suicidal'.

The difficulty in accessing funding is particularly acute for the cajas, which do not have the option of issuing equity to attract capital, says Robert Tornabell, an economist at Esade. CAM has already issued 'participative quotas' - shares without voting rights - and such options have been studied by other cajas. The International Monetary Fund (IMF) has proposed that savings banks be granted the right to "voluntarily" become a listed company. This idea was poorly received as the IMF also urged the government to make it mandatory for cajas that are "systemically important" - which probably means La Caixa and Caja Madrid - to become joint stock companies.

It is not all bad news for Spanish banks, however. Mr Maudos says that, for all their problems, the country's banks remain more competitive and potentially more profitable than their European peers. Boosted by their international adventures, Banco Santander and BBVA have posted solid results so far this year, as has La Caixa, the largest of the savings banks.

Mr Martin stresses that the IMF has described the Spanish banking system as sound and as having robust capital provision, with particularly positive comments for the commercial banks. But this could change if the economic situation persists.

"If economic stagnation lasts too long, the cajas will not be the only entities to suffer. The banking system as a whole could struggle," says Mr Ontiveros. Mr Tornabell goes further. "It is possible that some consolidation could happen among the smaller commercial banks, or that a foreign bank could take over one of them," he says.


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