As it is well known, Spain experienced much economic pain during the 2008 financial crisis, and the ensuing European leg of the Global economic disaster - the PIIGS crisis.
Background
As it is well known, Spain experienced much economic pain during the 2008 financial crisis, and the ensuing European leg of the Global economic disaster - the PIIGS crisis. Spain bore the blunt of a crisis none of it was its making. Its high unemployment didn’t react even during a long stretch of low interest rates. As a result, many local banks faltered in this process, fueled by a high rate of NPLs and a low rate of economic activity. Since then, its banking system has met a wave of consolidation: small/medium banks were absorbed by larger ones in order to boost overall systemic solvency.
Smacked dead centered in the Corona Pandemic; Spain is yet again facing challenging times. Tourism is obviously an important part of its economy, contributing to as much as 10% of its GDP. Spain is the most visited country in the World, according to the World Economic Forum, with 82 million visitors dropping U$ 72 Billion in 2019 at King Felipe VI’s coffers. The overall economy is expected to fall by as much as 15.2%, according to the Bank of Spain latest projections. As a result, the banking sector, which already had the lowest capital ratio in Europe entering this crisis, is bracing for a rise in NPLs (as reported by S&P Market Intelligence). The other side of the income statement does not expect much better news: below-zero Refi interest rates are weighting on their outlook for lending income. Thus, in order to avoid extinction, many T-Rex banks are absorbing minor predators in this doomsday scenario we like to call 2020/2021. Necessity driven banking M&A in Spain is on the rise…
Riding the new M&A wave
Spain is expected to end 2020 with a grand total of 10 stronger banks, from original 44 lending institutions in 2010. The recently announced merger between Unicaja and Liber bank reinforces the banking consolidation process occurring in Spain. The deal will make Unicaja 59,5% owner of the new bank leaving 40,5% of the equity into Liber bank shareholders’ hand. The new bank’s market cap is only E 2 billion Euros, making it Spain’s fifth largest, with a market cap that is less than 1% of the US’s leading bank JP Morgan, at roughly U$420 Billion. The US fifth largest bank, Morgan Stanley, is valued at U$ 88 Billion, or 36 times larger than the Spanish counterpart. American economy is only fifteen times bigger than the Spanish economy. Moreover, banking assets correspond to 217% of the Spanish economy, and only 64% of the US economy. So, if anything, these asset heavy banks should be valued higher than its American counterparts (on a pound per pound comparison). Humm…It certainly looks like Spain is a bargain at the moment.
Bumpy M&A wave – 2 CEOs cutting each other’s ride
Unlike regular M&A deals, after the junction of the two companies, both CEOs are still going to remain in their roles, stepping down only in two years. Usually, M&A deals tend to have a stronger "acquisition" aspect, where the buyer company normally ditches most of the staff from the seller. But on this case, the regulator probably imposed this condition to smooth the transition since there are many deals happening during this consolidation period in Spain.
EBC’s heavy handed oversight of Spain
In general, the Europe Central Bank (EBC) supports the Banking system consolidation movement in Spain. Even though a less fractionated market means less competition between players and thus may hurt final consumers, the EBC understands that its solvency benefits may outweigh the risk of higher interest rates in the retail market. But even though EBC was supportive of Unicaja and Liberbank consolidation, the BBVA and Sabadell merger didn't come together, as an example of restraint on the consolidation frenzy, which could hurt market share equilibrium. BBVA and Sabadell are presumably too large and do concentrate too much power in Spain, bearing a higher risk of effectively affecting interest rates on retail. As Brexit is finally happening, potentially another motive for the refusal of the deal could be EBC trying to strengthen the German Banking System stronghold in Europe. As the UK’s 14.2 Trillion Banking Asset base gone off its borders, the EU’s new king is Germany, followed by France, Italy and Spain. Let’s see whether the ECB imposes similar M&A enforcement rules as it did with the Spanish in the coming years…
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