Will consolidation wave hit Spanish banks again?

Eugenia Jiménez
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Will consolidation wave hit Spanish banks again?

Industry voices predict further mergers between Spanish mid-sized banks in the months to come as low profitability remains a major challenge.

Although Spanish banks have recapitalised their balance sheets, signalling the beginning of Spain's return to health a decade on from the Global Financial Crisis, their profitability is still relatively low which, according to banking experts, is preventing capital increases and hindering business growth. According to the Bank of Spain, the profitability of Spanish banks stands at around 7%.

In a bid to improve these low profit margins, some central banks including the ECB or the Bank of Spain, as well as industry professionals, point at mergers as an effective way to tackle this.

The ratings agency Standard & Poor's was one of those that earlier this year predicted more mergers between medium sized Spanish banks would happen in 2019. Low profitabilities and the fact that most of the Spanish banks are trading below the book value of their assets seem to be the biggest issues behind S&P predictions.

It also said that after years of rating upgrades for Spanish banks, "which have positioned them very close to the levels of December 2011, and even before the crisis", this year could see some downgrades. However, S&P admitted that Spanish banks were well positioned, with restructured balance sheets and favourable prospects in terms of credit quality.

The ratings agency Scope also believes there is room for tie-ups between Spanish banks, but not for cross-border mergers at the moment.

"In Scope we do not see value in these operations because there are hardly advantages of scale by bringing together two entities of different countries. In addition, regulators demand more capital from larger banks, which would be another issue," said Scope to the Spanish daily Expansión.

CONCENTRATION

After Spain's financial crisis exploded in 2008, a wave of bank collapses and mergers vastly reduced the number of smaller banks in the market and concentrated business among the biggest players.

Between 2008 and 2017, the number of Spanish banking entities went from 62 to 11 while the number of offices and employees decreased by 40% and 32% respectively.

These drops led to an increase in the percentage of the market held by the five largest banks in terms of total assets (Santander, BBVA, CaixaBank, Bankia and Sabadell), which rose from 42% in 2008 to 63%% in 2017, according to data from the European Central Bank.

For its part, investment banking Citi recently foresaw an increase in these figures with Spain's five largest banks likely to hold between 80 to 85% of the market by 2020. 

PAST AND POSSIBLE MERGERS

Since Spain's banking system started recovering from the financial crisis, two big mergers have taken place in the country's sector.

Spanish Bankia, which is 64% Spain's state-owned, acquired Banco Mare Nostrum (BMN) at the beginning of 2018. Following the acquisition, Bankia became Spain's fourth-largest bank by market capitalisation.

Banco Santander bought the Spanish lender Banco Popular for a nominal €1 in 2017 after European authorities stepped in to prevent the use of public aid.

Spain's Unicaja and Liberbank announced in December 2018 that they had begun discussions about a possible merger, a combination that would create Spain's sixth-largest bank by assets, with a total of €95.9bn.

Liberbank was created out of the merger of three regional savings banks in 2011, in the midst of Spain's banking crisis.

Unicaja, based in the Andalusian city of Málaga, was created from the merger of five local savings banks in 1991. 

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