Banking system: Regional savings institutions consolidate
By The Financial Times
Spain’s banking system is undergoing one of the biggest upheavals in its modern history.
Lenders and regulators have on previous occasions struggled through banking busts after the collapse of inflated asset values, but this is the first time such a battle at home has coincided first with a global financial crisis and then with sovereign debt jitters in the eurozone.
When the world was shaken by the collapse of Lehman Brothers in September 2008, Spanish banks found themselves in a relatively comfortable position.
They were already faced with falling property values and rising bad debts, but had little exposure to the complex “toxic” derivatives and US subprime mortgage lending that wreaked such havoc elsewhere.
All Spanish banks and unlisted cajas, the regional savings banks that account for about half the system by assets, were also protected by large reserves of countercyclical “generic” provisions built up in the good years that preceded 2008.
The largest commercial banks, Santander and BBVA, were further insulated from trouble by their investments in fast-growing emerging markets, particularly Latin America, and have continued to generate billions of euros of net profit through the recession and afterwards.
But as year followed year, the property market continued its decline and the generic bad-loan provisions were steadily consumed to protect the bottom line, it became clear the financial system was running out of time.
This was especially true of many of the cajas, which were heavily exposed to property developers and home loans and often controlled by regional politicians lacking the professional skills to manage in difficult times.
Lenders have suffered on several fronts. Bankrupt customers, especially property developers and construction companies, are unable to repay their loans, while the banks and cajas themselves remain dependent on wholesale financing from abroad to fund their operations.
The response of the Bank of Spain and of the current government has been to push through a radical reform of the whole network of cajas, opaque institutions with charitable aims and unclear ownership structures that in many cases date back more than a century.
Two small, failing cajas were “intervened” and then sold by the central bank, while most of the rest were offered loans from the Fund for Orderly Bank Restructuring (Frob) and told to merge, cut costs or rationalise themselves in a wave of deals that has already reduced their number from 45 to 17.
In the latest phase of the reform process, the regulator has threatened the weaker cajas with partial nationalisation if they fail to raise capital from private sources.
Nationalisation is ex¬pected to be the fate, for example, of Caja Mediterráneo (Cam), the savings bank whose plan for a merger with three other cajas collapsed when they concluded that Cam’s loanbook was too burdensome for the merged entity to absorb without itself being nationalised.
Others have sought outside investors, and four groups of cajas intend to list on the stock exchange through initial public offerings. This process is expected to reach a critical stage in the coming weeks when Bankia – the product of the merger of Caja Madrid and six other savings banks and by some measures the largest domestic bank in Spain – seeks €3bn ($4.3bn) to €4bn from the markets.
La Caixa, always the strongest of the larger cajas, is taking a different route and needs no IPO because it is using the existing listing of Criteria, its industrial holding group, as a vehicle to launch Caixabank on the stock exchange on July 1.
The estimates of how much new capital the system needs cover an extraordinarily wide range – the Bank of Spain puts the figure at just over €15bn, while some analysts say it could reach €120bn – but even the worst outcome is regarded as a manageable sum.
Regulators and officials also argue that they have been more transparent than other European countries. That is why Spain is submitting 95 per cent of its system to European “stress tests”, while some European Union states have done only the minimum 50 per cent required.
For Bankia and the other IPO candidates, these are anxious days, given the volatility of European markets and the low valuation that outside investors are inclined to give to Spanish financial institutions.
Bankia, which is so large and systemically important that the success or failure of its IPO will affect Spain’s standing in the sovereign debt markets, is the linchpin.
“Every Spanish institution has an interest in making it work,” says one Madrid-based investment banker. “We can’t allow it not to work.”