Not having learned a thing from merged banks that then collapsed.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Spain’s banking sector is about to be hit by a new wave of mergers and acquisitions, according to US rating agency Standard & Poor’s. The new phase of industry consolidation will begin with the stealth merger of largely state-owned Bankia with wholly state-owned Banco Mare Nostrum (BMN).
The two banks, each the product of two madcap mergers of Spain’s most insolvent savings banks, will be merged into one entity that is expected to become Spain’s fourth biggest bank by assets. The merger is more or less a done deal, for the simple reason that besides Bankia, BMN has no other suitors and its IPO last year was a complete dud. No private sector player seems willing to even touch its assets with a barge pole, let alone buy them at a “discount”.
“Zero Synergies”
Two renowned Spanish economists, Daniel Lacalle and Javier Santacruz Cano, have already expressed serious reservations about the proposed operation. Most importantly, there are no synergies to be had, they argue, since Bankia already enjoys a strong presence in virtually all the regions where BMN is present.
“This type of operation between banks normally creates no value,” says Lacalle.
Santacruz is no less emphatic, warning that we’re likely to see a repeat of the 1999 merger between Banco Bilbao Vizcaya and Argentaria to form Spain’s biggest bank, BBVA, in which the public bank (Argentaría) was gifted on a platter to the private bank (BBV). There’s also a “very big risk” of “destroying value for shareholders.” In the case of Bankia and BMN, the majority shareholder is the Spanish taxpayer, which by now is wearily accustomed to seeing the value of its holdings destroyed as it keeps being left holding the tab for bankrupt banks’ impaired balance sheets.
Despite only being in the “study stage,” the merger has already received the blessing of Spain’s caretaker government, Spain’s central bank, and Standard & Poor’s, which has promised not to downgrade Bankia’s credit rating after it has absorbed BNM’s assets and liabilities. Now, S&P is forecasting that the tie-up will herald a whole new wave of banking consolidation in Spain, with mid-size banks mostly on the menu.
“There are a number of medium-size entities that are going to struggle to reach levels of capital returns that will be sustainable in time and in line with shareholder expectations,” said S&P’s director of financial institutions, Elena Iparraguirre. “These (mid-size) entities will need to find a solution to the problem.” That solution, one assumes, will involve finding bigger banks to be rolled into.
The financial consultancy Baker & Mackenzie has forecast 54% growth in M&A activity in Spain for 2017, much of which will be concentrated in the banking sector. Besides the Bankia-BMN tie up and the flurry of takeovers of mid-size entities forecast by S&P, there’s also the prospect of a merger between one of Spain’s four biggest banks, Santander, BBVA or CaixaBank, and its sixth biggest — and “most Italian” — bank, Banco Popular, which is fast running out of options.
Just today, the new president of Banco Popular, Emilio Saracho, an ex-JP Morgan VP, has announced that he’s preparing the bank for a merger, most likely with one of Spain’s four biggest banks, Santander, BBVA, CaixaBank or Banc de Sabadell. The inevitable result will be much greater concentration and much less competition.
The Ultimate Goal
Banking concentration was always one of the crowning goals of Europe’s banking union. The banking union legislation, passed in November 2014, included a rather innocuous-sounding proposal called the “sales of business tool,” which made it much easier for big banks to grow even bigger, by gobbling up smaller, weaker ones.
In a speech in July last year, ECB President Mario Draghi blamed much of Europe’s banking crisis on competition from the thousands of smaller banks that are crowding out the profits for the big banks, while completely overlooking factors such as the excessive complexity and interconnectedness of the banking system, the failure of the universal banking model, the zombifying banks at the top of the financial food chain, and, of course, the ECB’s negative rate policy. No, it’s all the fault of the small banks.
“Over-capacity in some national banking sectors, and the ensuing intensity of competition, exacerbates the squeeze on margins,” he said.
Since that speech, apart from the occasional shotgun marriage between struggling entities in Italy, M&A activity in Europe’s banking sector remains stagnant. Put simply, few banks want to buy or merge with other banks, for two obvious reasons:
One, they don’t have the disposable capital for such an operation. In Spain, Germany, and Italy the biggest banks (Santander, Deutsche and Unicredit) have enough on their hands trying to expand their own capital base this year to fill holes in their balances sheets.
And two, they also have no idea just how serious their rival institutions’ problems are. As the Bankia example showed, merging one insolvent institution with another (or others) often compounds their problems. Bankia was spawned in 2011 from the merger of seven insolvent savings banks, only to collapse in 2012. It’s not the only major bank to have failed after a big merger or acquisition; so, too, did the Royal Bank of Scotland after its suicidal purchase of ABN Amro, in 2007. And there’s Monte dei Paschi, which collapsed years (and multiple bailouts) after purchasing Antonveneta from Santander for an exorbitant €9 billion.
Now, Europe’s financial authorities want more of the same while ignoring the effects of further concentrating risk, power, and market share among the already too big to fail institutions at the top. By Don Quijones.
This time, the ECB is already doing “whatever it takes.” And still. Read… Euro Breakup Rattles Investors Once Again
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What can possibly go wrong…. :-)
“”” the thousands of smaller banks that are crowding out the profits for the big banks “””
The goal of the large corporations is to pay of the legislature ( bribes otherwise known as campaign contributions )
So they regulate small business out of business
Whether it be a bank, a doctor office, an attorney or architect office or any other office.
Make regulations and computer support so expensive no small business can survive.
Legislature is paid to do it and does it.
.
The consumer suffers, but the consumer is so desperately distracted they do not even see it coming and continue to vote for the corrupt.
Club-med in particular needs much more banking consolidation.
What it does not need, is any more of the crony corrupt gross over-payment by the absorber for the absorbed.
If another bank is worth 50 cents, and teetering on bankruptcy, why is anybody paying more than 25 for it.
In reality, in Club-med, all M & A’s should only be funded by issuing new shares, to replace the existing ones in the target, at a big discount.
When this cause a share price drop, the banks should attempt to buy back and cancel.
The profit is in the buy price, in these absorption’s, which is why euro banks get into trouble, as they pay to much to their crony’s for them.
They probably need Jaime dimon to do the purchase arrangements. He buy’s bank’s for 2 or 3 dollars each when he is the only buyer at the table.
I was looking for the JPM involvement and then found it about 2/3’s through.
Of course it will be a disaster. Not for those in the M and A business, nor for the senior players.
Wealth transfer from the masses to the few will continue until morale improves.
The problem with these megabanks is very simple: who is going to bail them out? The Italian government is literally struggling to scrape together the resources to bail out two local banks and the two Atlante funds are apparently already out of money and breath.
Unicredit alone is looking to raise something along the lines of €13 billion in new capital in 2017 to plug the holes in its books.
Of course I can hear the usual replies: central banks and taxpayers will bail out these megabanks.
But the problem is this may be a classic case of a python trying to swallow a cow: these banks may simply be too large for anything more than making their demise as painless as possible.
Italy is struggling to find the resources to allow a gaggle of minor local banks to “extend and pretend” and there’s no political appetite for a taxpayer-backed “bad bank” to ease MPS woes.The same applies to the harebrained scheme to swap MPS bonds for sovereign Italian bonds: it died without even making it to Brussels and Frankfurt when someone noticed the only two buyers Italy has left for her bonds are her own banks and the ECB. Ironically enough those historically low interest rates that allow the Italian government to be solvent are what effectively killed the once thriving market in Italian sovereign bonds.
Personally I suspect if Santander were to experience “difficulties”, the Spanish government would have a really hard time bailing them out despite the megabank being an officially sanctioned “too big to fail” institution. A bailout through the ECB could be negotiated but the cost, especially at a time when the political landscape of Europe is radically changing, could be too high for Madrid to bear.
The premise of this article is wrong. During the banking crisis, none of Spain’s independent banks (big or small) needed a bail out, unlike banks in other countries. Many of the Cajas, or savings banks which were badly run (with politicians on the board) did need a bail out. Now many of those Cajas were merged into one large bank known as Bankia. Bankia is run by a serious banker who comes from BBVA. He has managed to improve it’s financial situation considerably and the bank is growing year after year.
So, don’t worry about Spain’s financial institutions. Most of its Cajas have disappeared and the banks are well run. If you want to fret about something worry about Germany’s or Italy’s financial institutions.
“The premise of this article is wrong. During the banking crisis, none of Spain’s independent banks (big or small) needed a bail out…”
Nope. The Financial Crisis arrived earlier in the US than in Spain (or in Europe in general). Same crisis (leverage, housing, bad loans, etc. along with reckless financial institutions and sleeping regulators, among others), different arrival times.
You don’t appear to have read my post.
I read your post. When I came to your description of Bankia I had to laugh. I didn’t want to get into it. Remember Bankia’s horrific IPO? And the subsequent bailout?
Zalacain,
When the woefully mismanaged Cajas were bailed out between 2011 and 2012, so, too, in many ways, were Spain’s biggest banks. Who do you think the cajas owed much of their money to (apart from, of course, French and German banks)? If the Cajas hadn’t been bailed out, it would have only been a matter of time before the contagion spread to banks like Caixabank, BBVA and Santander.
In other words, the bailout of the Cajas was essential to avoid having to directly bail out the bigger boys. The same thing’s happening right now in Italy. If MPS goes down, so, too, eventually, will Unicredit. For Unicredit to have any chance of cleaning up it’s rancid books, it needs the Italian/European taxpayers to bail out Italy’s smaller, somewhat more bankrupt banks. Otherwise, investors will not part with the 13 billion euros of fresh funds the bank needs to give itself any hope of a future.
And lest we forget, a certain man by the name of Mario Draghi has spent close to four trillion euros trying to keep Europe’s banking system / EU project alive. Now, is it not possible that Spain’s biggest banks may also have benefitted somewhat from Draghi’s ginormous splurge on, say, Spanish bonds, considering they are (or at least were) the biggest holders of Spanish bonds?
You see, bailouts can come in many shapes and forms.
Yet despite all the tens (hundreds if you include all the government guarantees) of billions of euros spent, directly or indirectly, on Spain’s banking system, Spain’s sixth biggest bank (and ’til not so long ago one of the world’s best run financial institutions), Banco Popular, is teetering on the verge of collapse and will soon be merged into one of Spain (or Europe´s) bigger banks, probably with the help of Spanish and/or European taxpayers.
Zalacain
(Interesting pain killer name).
Anyhow, how much of your own money have you actually invested in Spanish banks, and how is the investment doing?
Given your quibbles with Wolf & Don over recent banking industry history & fundamentals, I’m guessing “not well”.
√
Denying facts, does not change them, something global warming deniers and p 45 also need to learn.
Perhaps Zalacain is merely a member of the Spanish crony corrupt group, that benefited from the mergers, so see’s no problem with the current situation. It is the only logical explanation for his/her position.