BBVA agreed to sell its US assets to PNC in an all-cash deal for $11.6bn, which could usher in long-mooted consolidation in European banking © FT montage

The desolate streets around Madrid’s 17th-century Plaza Mayor help explain why Spain’s banks have embarked on a hasty round of consolidation that could put up to three-quarters of the country’s loans and deposits in the hands of just three lenders.

José Fernando Bartolomé, whose family operates tourist outlets in the neighbourhood, says his company, EU Souvenirs, can no longer service its outstanding loans. Because of the coronavirus crisis, the group’s revenues have fallen by more than 90 per cent and its debts have tripled to €4.5m.

In these circumstances the question becomes if — rather than when — such debtors can ever repay their obligations.

“We were doing well until 2020, when Covid came and killed us,” said Mr Bartolomé. “Now we will have to work for six years just to pay off our Covid debt — and freeze our loans until we are in better conditions.” 

This bitter economic climate has helped spur merger negotiations among Spain’s largest banks, which investors say could usher in a wave of long-mooted consolidation across Europe.

“Even before the crisis, European banks were not profitable, struggling with negative interest rates,” said Francisco Riquel, head of equity research at Alantra Equity Research in Madrid. Until about a year ago many banks held out hope that rates would rise relatively soon, he added. “Now expectations are that we will remain in negative interest rate territory for another ten years, so banks will have to transform and adjust to survive, gaining bigger scale through mergers and acquisitions.”

Non-performing loans are expected to start rising again next year

Nowhere is that more true than in Spain. The economic pressures in the country are among the fiercest in the eurozone — the Spanish government expects gross domestic product to contract by more than 11 per cent this year.

With tourists likely to stay away from the country for months and unemployment set to surge as temporary bans on firing employees expire, both European and national regulators have called on the banking sector to prepare for a rise in bad loans next year.

In response, Spanish banks have in recent weeks kicked off a round of consolidation that stands out from the rest of Europe.

Last week BBVA agreed to sell its US assets to PNCBank in an all-cash deal for $11.6bn. The same day it confirmed it was in talks to acquire midsize domestic rival Banco Sabadell. CaixaBank hopes to complete an agreed €17bn merger with state-controlled Bankia by February or March. And Santander, which in 2017 absorbed its failed competitor Banco Popular, announced earlier this month that it is closing up to a third of its branches in Spain and buying the technology platform of disgraced German payments provider Wirecard to ramp up its online operations.

If both mergers are successful, CaixaBank plus Bankia would command 25-30 per cent of the domestic market’s loans, deposits and mutual funds, and BBVA plus Sabadell 20-25 per cent. Santander, which stresses that only about 15 per cent of its business is in Spain, is at 15-20 per cent market share, depending on the specific product.

Only relative minnows would be left in the Spanish market, two of which — Unicaja and Liberbank — are also in the process of merging.

“Spain is consolidated and pretty much done,” said Stuart Graham, founder of Autonomous Research. “The interesting thing is that there are now three big Spanish banks and each will have to look outside Spain for further expansion.” 

Politicians and policymakers across Europe have long sought to persuade the region’s lenders to consolidate a fragmented market that has lost ground in profitability and size to US and Chinese rivals since the financial crisis.

In July, the European Central Bank tried to remove several hurdles to spur activity. This included recognising an accounting gain, known as badwill, generated when a bank buys a rival for less than the fair value of its assets minus its liabilities. 

After Spain, the most active banking sector for deal talks has been Italy, where the country’s largest lender Intesa Sanpaolo’s acquired smaller rival UBI Banca in July. But further Italian dealmaking has stalled owing to the unresolved fate of Banca Monte dei Paschi di Siena, majority-owned by the state since a 2017 bailout, whose sale has been complicated by legal disputes.

In contrast, CaixaBank’s plans to acquire Bankia, the former savings bank controlled by the Spanish state after a €22.4bn bailout in 2012, appears to have triggered the latest round of consolidation in Spain.

“We are all in a similar situation,” Javier Pano, chief financial officer of CaixaBank, told the Financial Times. “Negative interest rates were the most important consideration; consolidation is one way to make a bank’s profitability sufficiently attractive to shareholders, and other entities could arrive at the same solution as us.”

Spanish banks have some of the weakest levels of capital in Europe

However, BBVA stressed its own plans for Sabadell are far from a done deal. “There is no certainty that a decision will be taken,” said Onur Genc, BBVA chief executive, last week. “We are very early in the process and we are starting the process of analysing . . . We don’t feel forced to do anything. We already have 15 per cent market share in Spain . . . above the minimum efficient scale required to operate successfully in a country . . . We will only do it if there is value for shareholders.” 

Meanwhile, Santander argues that the key development is the shift of banking online, which has been greatly accelerated by the Covid-19 crisis.

Although Spanish banks overall have halved their number of branches over the past decade, the country still has about 50 branches per 100,000 people — one of the highest levels in the EU. The prospective mergers mean that BBVA and CaixaBank are highly likely to follow Santander in culling branches further.

“Overbanking is a legacy of the bubble that preceded the financial crisis,” said Xavier Vives, professor of Economics and Finance at IESE Business School. “And naturally as the economic perspective in Spain is worse, there is more pressure here to deal with it.”

Spanish banks also stand out for their low levels of capitalisation. At the end of last year, the four big European banks with the lowest ratios of tier one capital were Santander, Sabadell, BBVA and CaixaBank, according to a study carried out by the European Banking Agency.

Spanish bankers said this metric underestimated their financial strength. They argued that since they were primarily involved in retail, rather than investment banking, their activity is much less risky than that of peers such as Deutsche Bank. They also highlighted the considerable provisions they had made against loan losses. Amid the coronavirus pandemic this year, past due loans remain at their pre-crisis level of about 3 per cent of total loans — less than half the percentage in Italy.

Nevertheless, nervous regulators have been reassured by the plans for mergers and divestments, despite fears about unemployment and the economic outlook next year. In the case of BBVA’s sale of its US assets, the deal will increase its capital buffer from about 300 to about 600 basis points.

CaixaBank’s reserves could also benefit from its planned tie-up with Bankia. “We have a more diversified business model,” said CaixaBank’s Mr Pano. “They have excess capital, so the combination would result in a stronger and more profitable bank.”

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