May 26 (Bloomberg) — In the rush to fix its struggling savings banks, Spain risks leaving the job half finished.
Case in point: Caja de Ahorros del Mediterraneo’s proposal to merge with three smaller savings banks, creating a lender with 135 billion euros ($167 billion) in assets. The combination would let them keep separate branches and workforces.
“It’s a halfway house that creates some savings but not enough,” said Inigo Lecubarri, who manages about $170 million at Abaco Financials Fund in London. “If you’re going to do these mergers, you should aim to cut costs.”
Spain is pushing for mergers between “cajas,” lenders run as foundations that helped fund the country’s property boom and account for about half of its loans. By melding ailing lenders with stronger partners, the central bank aims to purge bad loans and lay the groundwork for economic recovery as the government tackles its budget deficit. Lumping lenders together without reducing staff and closing branches isn’t likely to accomplish those aims, Lecubarri said.
The state of Spain’s banks has taken on global significance since Greece’s sovereign debt crisis focused attention on the nation’s public finances. Spain forecasts its budget deficit will amount to 9.3 percent of gross domestic product this year, equal to the shortfall projected for Greece by the European Commission.
Concern that Greece’s budget woes will spread to nations such as Portugal and Spain prompted the European Union and International Monetary Fund to pledge almost $1 trillion earlier this month to backstop the debt of member nations.
CajaSur Seizure
The Bank of Spain seized CajaSur on May 22 after the bank, based in the city of Cordoba and controlled by the city’s Roman Catholic cathedral, decided against a merger with Unicaja, a bigger, profitable lender.
The regulator removed management and placed CajaSur under the control of a government fund that has the authority to spend as much as 99 billion euros on bank rescues. Crippled by loans for property development, CajaSur’s proportion of defaults to overall lending had soared to 8.3 percent from 1.9 percent in 2007, rendering it insolvent.
The seizure inflamed concern about the health of Spain’s banks and the government’s finances, weighing on the euro and financial shares across Europe. The 52-company Bloomberg Banks and Financial Services Index dropped 3.9 percent yesterday.
Banco Santander SA, the largest Spanish bank, fell 3.9 percent, while Banco Bilbao Vizcaya Argentaria SA, the second biggest, slid 4.5 percent.
‘Dirty Linen’
“Everyone knew the restructuring had to happen, but when the dirty linen starts being laundered in public, it brings it back to the front of people’s minds,” said Andrew Lynch, who manages about 1.5 billion euros at Schroder Investment Management in London.
The four-way combination announced on May 24 would create the fifth-biggest banking group in Spain by assets, with 2,300 offices and 14,000 employees. The cajas chose to be required to monitor solvency and liquidity centrally, under a single management. Their brands, local branch networks and spending on social programs would remain independent.
The deal, which would involve an injection of cash from the rescue fund, hasn’t been signed off by regulators. To tap the fund, the banks may have to agree to additional restructuring measures.
The Bank of Spain has approved the model for such mergers, dubbed “cold fusions” by the Spanish press. A central bank spokesman declined to comment.
‘Better Than Nothing’
Three savings banks — Caja Navarra, Caja Canarias and Caja de Burgos — agreed to a similar combination in April.
“It’s better than nothing, but worse than a full merger,” because the savings would be less, said Jordi Fabregat, a professor of management and financial control at Esade, a Barcelona business school.
The new bank springing from the combination of Caja de Ahorros del Mediterraneo with Grupo Cajastur, Caja de Ahorros de Santander y Cantabria and Caja de Ahorros y Monte de Piedad de Extremadura, will have costs amounting to 47.6 percent of revenue, the lender said.
That compares with 31 percent at Madrid-based Banco Popular Espanol SA, a commercial bank that cut its Spanish workforce by 4.5 percent in the year through March as it closed 100 branches.
Santander, based in the northern Spanish town of the same name, shed 1,600 branches following its acquisition of Banco Central Hispano in 1999. Enrique Candelas, head of the bank’s branch network in Spain, later said the bank shut too many.
‘Supercaja’ Model
The model chosen for what Fabregat termed the “Supercaja” avoids conflicts over job losses. CajaSur’s attempt to merge with Unicaja failed because unions wouldn’t endorse jobs cuts resulting from combining two lenders with overlapping branch networks, said Andres Hens, a member of the Cordoba lender’s board.
Spain’s 20 percent unemployment rate means job cuts are a tough option for savings banks, said Lecubarri. “You do mergers to cut costs, and in the financial industry that means firing people,” he said.
In a speech in April, Bank of Spain Governor Miguel Angel Fernandez Ordonez said most banks had understood the need for restructuring and mergers. The criteria that “should prevail” was the sufficient reduction of capacity, the soundness of the resulting banks and the minimal use of public funds, he said.
“The weakness of the cajas has played on Spain’s financial system for some time,” said Matthew Maxwell, a credit analyst at Societe Generale in London, who added that some of the lenders are healthy. “It all depends how quickly the real restructuring begins.”
To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net
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