Spanish banks seek mergers as outlook darkens

Barcelona

A WAVE of mergers is sweeping across the Spanish banking sector as lenders face up to a pandemic-induced recession, ultra low interest rates and growing competition from financial technology startups.

CaixaBank, Spain's third-largest bank, and Bankia, its fourth-largest, approved a merger in September which will create the nation's biggest domestic lender with around 664 billion euros (S$1,060) in assets in the country.

And BBVA, the country's second-largest bank, announced last Monday that it was in talks with Banco Sabadell, Spain's fifth-largest bank, over a possible tie-up.

If successful, it would create Spain's second-largest domestic bank, far ahead of Santander, which would still remain the country's biggest bank by total assets due to its huge international presence.

Mid-sized lenders Liberbank and Unicaja, meanwhile, confirmed renewed merger talks in October.

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The trend is not new in Spain, which saw dozens of lenders disappear in a wave of tie-ups that followed the 2008 financial crisis, when Madrid received a European Union bailout of 41.3 billion euros for its ailing banking sector.

These new operations are "defensive to avoid problems in the future," Xavier Vives, of the IESE Business School in Barcelona, told AFP.

But, unlike during the previous crisis, when lenders faced a solvency problem, this time around the issue is a lack of profitability, he added.

"Interest rates are low, the yield curve is very flat, and with the Covid pandemic, revisions of interest rates have been postponed. Under these circumstances, the banking business is not very profitable," said Mr Vives.

At the same time, banks are facing fierce competition from financial technology startups, or the so-called "fintech" sector, which operate online and have much lower operating costs than traditional banks.

"Certainly, with negative interest rates it is very difficult to earn money," said Ricardo Zion, a bank expert with the EAE Business School.

"But the big problem for banks is that it is impossible to be profitable with a model based on having branches, especially to compete with the 'fintech' and new operators."

"It's like the airlines. A traditional airline has its own fleet and pilots who earn 400,000 euros a year, and it must compete with a low-cost airline that uses rented planes and pilots who earn 60,000 euros."

At a time when banks are boosting their provisions to face an expected rise on bad loans due to the economic fallout of the pandemic, these merger operations "strengthen their solvency," Mr Zion said.

"Unlike during the last crisis, when banks were a problem, now they must be part of the solution," he added.

Between 2008 and the end of 2019, Spanish banks slashed nearly 100,000 jobs, or around 37 per cent of their workforce in 2008, according to the CCOO, Spain's largest union.

Fresh job cuts have already been announced. Santander plans to cut 4,000 jobs and Sabadell another 1,800, while the merger between CaixaBank and Bankia will reportedly cause the loss of 8,000 jobs. AFP