Only months after two emergency rescues and a wrenching series of mergers among Spanish cajas de ahorros or savings banks, a second round of consolidation is being predicted by the country’s bankers, officials and financial analysts.

With Spain’s economy still stagnant after the global crisis and the collapse of the Spanish housing bubble, commercial banks and unlisted cajas have been amassing unwanted real estate on their books, while bad loan ratios rise and the pie of profitable banking business continues to shrink.

Banesto, the first listed Spanish bank to report, set the scene last week for grim third-quarter results when it announced a 52 per cent drop in net profit compared with the same period last year, partly because of additional loan loss provisions arising from new, tighter regulations imposed by the Bank of Spain.

Following the collapses of the relatively small Caja Castilla La Mancha and CajaSur, the central bank successfully bullied the original 45 cajas into a series of mergers over the summer that has reduced the number of holding groups to 18 – with the help of nearly €11bn ($15.3bn) from the Fund for Orderly Bank Restructuring, or Frob, and €3.8bn from a deposit guarantee fund.

But the economic climate is so gloomy and the cajas have made such slow progress with cutting costs, laying off staff and closing branches, that further steps to rationalise one of Europe’s most overbanked nations – the country has some 44,000 bank branches – are seen as inevitable.

“The cajas have been forced by the Bank of Spain to integrate but they are doing nothing,” says one commercial banker. “Even the Bank of Spain is talking about a second round.”

Emilio Ontiveros, chairman of Analistas Financieros Internacionales, a research group, agrees: “We think what’s happening with the cajas is not the end of the restructuring.” He notes that in regions such as Galicia and Catalonia where mergers have taken place between local cajas, up to a quarter of branches are surplus to requirements.

Iñigo Vega, bank analyst at Iberian Equities, the broker, says the problem is not just about the size of the merged entities but also their lack of geographical diversification and coverage across Spain. “They are injecting new money and there has been some consolidation,” he says. “But if you look at the number of cajas they are not really in an optimal configuration.”

The result is that while stronger banks such as Santander and cajas such as La Caixa are able to weather the downturn and raise funds through bond issues, some of the smaller savings banks remain excluded from the wholesale financing market on which their future depends.

The bright side of all this, according to investment bankers hungry for business, is that the savings banks will be selling non-core holdings in other companies and that the cajas’ own restructuring could culminate in the purchase of equity stakes in cajas by local or foreign banks.

A new law governing the cajas – which have accounted for about half the banking business in Spain, are typically controlled by regional politicians and devote profits to charitable works – allows them to raise capital by selling up to half the equity of a holding structure.

JC Flowers, the US buy-out group, bought €450m of convertible bonds from Banca Cívica, a merger of three cajas, shortly before it was named as one of the five Spanish savings banks to fail the European Union bank stress tests in July.

“The end-game, and it’s a few years away, could be some of these companies going public,” says one Madrid-based investment banker. “For that to happen they need to have a credible story . . . There will be, I think, a second round of consolidation, mainly with the ones which are not yet big enough to get funding or to be profitable in the longer term.”

With Spanish domestic banking in retreat, and cajas likely to sell branches or even stakes in their operations, there are obvious opportunities for big Spanish or international retail banks such as HSBC, Brazil’s Itaú-Unibanco, Barclays and Deutsche Bank (the last two already have Spanish retail operations).

For Mr Vega, the analyst, the big question is therefore whether the expected mergers will happen among the cajas or will involve listed banks. Assuming that the economy returns to normal after 2012 or 2013, he says, “banking in Spain will remain a good business”.

Source: Financial Times