Fri. Apr 19th, 2019

The mergers that come in the European and Spanish banks: who will be the protagonists | Markets

The mergers that come in the European and Spanish banks: who will be the protagonists | Markets

Germany has already started up definitively to respond to the profitability problems of two of its main banks, Deutsche Bank and Commerzbank. After endless rumors, both entities confirmed last Sunday that they have begun negotiations for their merger, warning that they are exploratory and that they do not have to be set. The strong opposition of the unions to an operation that is expected to cause thousands of layoffs and warnings from the ECB, which is not to the liking of the creation of "national champions" without further, without there being a clear financial rationality, have already given a idea of ​​the difficulties for such a union.

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But the project of fusion of these two entities -which starts not without political pressures, at a time of adverse market, aggravated by the economic slowdown- It has inevitably placed the European banking system on its guard and once again the latent expectation of new corporate operations. Also in Spain.

Mergers are an obvious way out of a sector with multiple challenges ahead. The long period of zero interest rates has undermined the profitability of the banking business, in addition to the regulatory demands for more capital and the need to make significant investments in technology with which to address the inevitable challenge of digital transformation, under the risk of losing a valuable market share against the thriving fintech and the internet giants.

If the outbreak of the crisis imposed mergers as an exit with which to reinforce capital, at present it is the low profitability that puts pressure on the sector. "Mergers have advantages, such as diversification or the creation of economies of scale, which allow investment in technology. But they are also expensive and complicated, especially in the current environment of lower economic growth. They are not the panacea. Not all mergers give rise to a stronger entity ", warns María Cabaynes, senior vice president of Moody's. It is enough to remember the accelerated amount of entities that gave rise to Bankia and the resounding nationalization that was necessary later.

National Champions

The hum of bank mergers is a constant in the sector, stoked even by the regulator, who insists on reminding the entities of the pending challenges. In the sector, in any case, the conversations initiated by Deutsche and Commerzbank are not going to provoke an immediate wave of mergers in Europe and highlight that each market has its own peculiarities.

Spanish banking is more profitable and efficient than the European banking average, but remains behind in terms of solvency

"The degree of consolidation of the banking markets differs from country to country. For example in Spain has made a significant consolidation effort. In contrast, in other markets such as Germany and Italy there is still a significant margin to advance consolidation given that markets continue to be very fragmented, "explains Nacho Moreno, head of investment banking at Barclays in Spain.

The pressure to address concentration movements is therefore greater in markets other than Spain, which enjoys levels of profitability and efficiency above the European average (see graph). "In terms of efficiency, Spanish banks are in a better position than French or German banks (the average for European banks is around 63% compared to 52% in Spain). But in capital, it compares worse with Europe, "adds Cabaynes.

"It is true that the concentration experienced by Spanish banks is not comparable to that of any other large country in the euro zone and that it has already adjusted its operational capacity enough. But there is always room for more mergers ", points out Fernando Rojas, banking expert at AFI.

Without the pressure to merge that may have German or Italian banks, Spanish banks do not stop monitoring closely. The merger negotiations held by Unicaja and Liberbank and the recent frustrated offer of Abanca on the latter are proof that the merger process is alive in Spain, although the rest of the entities claim to maintain their vocation of independence, in the the case of the small ones, or not to undertake new purchases in the domestic market, in the case of the large ones. In fact, Spain already has its own national champions.

BBVA could find in the eventual sale of Bankia a way to reduce exposure to emerging markets that has taken its toll

"Following alone is a demanding option, you have to do things very well, be efficient and do not give up investing in technology. The challenge of an entity that wants to continue alone is efficiency and profitability, "warns Francisco Uría, partner responsible for the financial sector of KPMG EMA. "Medium-sized entities are those that most need to improve their capacity to compete and generate economies of scale, to diversify their sources of income and to realize synergies," adds Luigi Motti, banking analyst at S & P.

The focus is therefore placed on small and medium-sized Spanish banks, after the majors - Santander, BBVA and CaixaBank - have already reached a high domestic market share and have found abroad - Santander and BBVA - the diversification of income with which to offset the domestic ballast of zero rates or are enhancing, as is the case of Caixabank, the area of ​​bancassurance and asset management to obtain higher returns than those of its domestic competitors. "But these strategies are not easy to implement from scratch because they are the result of the strategic vision that the management teams had many years ago. Nor is it obvious to try to set up a bancassurance and management platform from scratch, "says Nacho Moreno.

The medium and Bankia

"The union of Unicaja and Liberbank makes all the sense, they go from a local to a peninsular one. Ibercaja has a very strong presence in its region and significant fee income from asset management, although its IPO is going to be complicated. It is in Bankia or Sabadell where we can see the most interesting movements ", point out in the financial operations division of an international business bank.

Experts highlight the attractiveness of the Madrid market, where Bankia is strongest, and the entity's comfortable capital position. But they also warn of the difficulties posed by their privatization in a market horizon that does not augur increases of rates that boost value and allow a sale of 61% of the capital that the FROB maintains.

"Bankia has already completed its restructuring and cost savings well. It is difficult to see a trigger for the quote, there should be a radical change in the type perspective, "they argue in another business bank, where they contemplate a merger as a plausible alternative for privatization and the exit of the FROB.

The merger is not in any case in the roadmap of Bankia, whose president has just announced a rise in the dividend and to claim the need to keep the entity away from political pressures in the nearness of the elections. But in the constant search for business alternatives that the sector proposes, there are several business banks that coincide in the fit that the entity presided by José Ignacio Goirigolzarri could have for Sabadell and BBVA.

"Sabadell quotes at a price of 0.4 times book value, a price at which other times we have seen banking operations. And in the case of BBVA, the market is demanding that it balance its asset allocation and lower the weight of the emerging ones, which penalized it so much in 2018. Bankia would be an opportunity to rebalance its portfolio ", they add in another bank, where they remember that the entity lost the chance to gain more size in Spain with Popular.

Local scope, not European

The pools do not overlook key uncertainties for the aforementioned entities, such as the governance problem faced by BBVA with the eavesdropping of Villarejo, or the difficulties in the United Kingdom of Sabadell, to which investors demand more capital. For now, only Abanca has openly shown its aspiration to grow in Spain with purchases with its bankruptcy on Liberbank and the merger of this entity with Unicaja cancels its most obvious purchase option.

Any operation will be pending in any case of the result of the general elections, while Low market valuations also do not invite mergers that may require additional capital increases. Even so, in the sector they agree that the new mergers will be a matter of time and will be national.

"It is early to see cross-border mergers, since the banking union project has not yet been completed. We see more likely that integrations will take place at the domestic level because in these cases the execution risk is lower and the potential for synergies is higher, "they conclude from S & P.


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