The plan: Take out mid-sized banks to create a “bipolar” industry of large and small banks, and a lot less competition.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Barely nine months have passed since Spain’s sole officially too-big-to-fail bank, Banco Santander, took over its collapsed rival, Banco Popular, in a shotgun marriage hastily endorsed by panicked Spanish and EU authorities. Santander still hasn’t even fully digested Popular’s assets, yet it already has its sights set on new takeover targets.
In a speech to shareholders the bank’s president, Patricia Ana Botín, stressed the lender’s capacity for “organic growth” but she also refused to rule out the possibility of fresh acquisitions. “We have the obligation to analyze the opportunities for external growth that arise in our markets and that could strengthen our business,” she said.
The speech comes at a time that Goldman Sachs is predicting a new round of consolidation in Spain’s financial sector. After the acquisitions of Popular (by Santander) and BMN (by Bankia) last year, the first cycle of the consolidation process of Spanish banking is almost complete, Goldman said in a recent note to investors. Now, a second cycle, designed to capture new efficiency gains, can begin.
In the report the New York-based investment bank identified the most attractive acquisition targets for alpha-banks like Santander, BBVA and Caixa Bank, based on factors such as the target bank’s valuation, size, shareholding structure and potential cost savings for the buyer. The bank that came out on top is Unicaja, “a relatively small and clean bank,” with significant potential for generating efficiencies “if its branch network is reduced.”
Banco de Sabadell, Spain’s fifth largest lender, placed second on the list, although given its size, Sabadell is just as likely to acquire another bank as be acquired by one. Also on the list of takeover targets are smaller lenders like Kutxa, Ibercaja, Cajamar, Abanca and Liberbank, which almost collapsed in the wake of Popular’s demise last summer.
Spain’s banking industry is already heavily concentrated, with the five biggest lenders — Banco Santander, BBVA, CaixaBank, Bankia and Sabadell —controlling 72% of the retail banking space. Before the crisis the country was home to 45 savings banks and a dozen commercial banks. Now there are barely more than ten large or mid-size lenders left. And the latter are right at the top of the former’s menu.
“The essential problem is for mid-sized lenders whose collapse [like Popular’s] could trigger adverse effects on the system,” said Fernando Restoy, former Bank of Spain governor and current president of the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS
Once they do, the job of monetary authorities will be to “help facilitate” corporate operations that would favor an “orderly transition towards the industry’s new bipolar structure” (i.e. of small and big banks), he said. It goes without saying that in this new “bipolar” world the emphasis will be on creating ever bigger banks rather than, say, breaking up big banks into ever smaller banks.
Senior ECB representatives have repeatedly underscored the need to weed out smaller banks in order to cut competition for bigger lenders. In September 2017 Daniele Nouy, Chair of the ECB’s Supervisory Board, and thus in charge of the Single Supervisory Mechanism, which regulates the largest 130 European banks, blamed fierce competition from smaller banks. Rather than lots of competition between banks, what Europe needs, Nouy said, are “brave banks” that are willing to conquer new territory.
It’s not just senior central bankers who are calling for a new round of consolidation for Europe’s banking industry. So, too, are executives at the helm of the big banks that stand to benefit the most from the industry’s restructuring. They include John Cyran, the CEO of Deutsche Bank, which last week reported yet another round of annual losses while dishing out bonuses that had somehow quadrupled in size on the previous year’s bonus pot.
In a panel discussion at last year’s Frankfurt European Banking Congress, Cyran argued that Europe would benefit from having “a handful of institutions” powerful enough to compete on a global stage with larger US and Chinese rivals. “There are too many institutions in Europe, especially in this country (Germany),” he said. “China and the United States have very large banks which have the heft to invest globally and which can withstand relatively long eras of low returns.”
Deutsche, which has already acquired domestic peers Postbank and Sal. Oppenheim over the last decade with no noticeable improvement in its financial health, held talks with its biggest rival Commerzbank over a potential merger in 2016. In the end the talks fell through but every few now and then fresh rumours reemerge that a tie-up between Germany’s two biggest, serially troubled banks is in the works.
Both lenders are in such dire straits that the German newspaper recently Welt just asked if they can still be saved. Perhaps the only way is to meld them together into the world’s scariest semi-publicly owned Frankenbank, as Reuters’ Breaking Views just suggested. The alternative would be for bigger, healthier European alpha banks to swoop in and take over Germany’s two most important lenders, a solution that is unlikely to satisfy German policymakers and business leaders.
Meanwhile, Banco Santander, another global systemically important lender, has acquired a taste for taking over struggling mid-sized banks. And it knows that in this endeavor it can count on Europe’s monetary, political and regulatory authorities for a helping hand whenever needed. By Don Quijones.
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