Competition Eats the Profits of Big Shaky Banks in Euroland: So Consolidate

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). “These entities could come under heavy pressure in the future.”

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.

After the largest British outsourcer collapsed, two other large British outsourcers are also on the verge of collapse, and the vultures are circling. Read…  Was Carillion’s Collapse the Beginning of the End for UK’s Outsourcing Sector?

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  15 comments for “Competition Eats the Profits of Big Shaky Banks in Euroland: So Consolidate

  1. peter says:

    Why am I not surprised that big banks want less competition, bonuses have soared and that the politicians, who apparently work for the public who elect them, are behind the banks? Same old, same old.
    As usual, the man and woman in the street will suffer from less competition and rising costs, due to increasing bonuses, and not benefit from economies of scale.
    When are we going to get some sense back in the economic system? I despair that it will simply steam roller ahead and the average person out there has no power, no say and it completely and utterly irrelevant in this massive money making system. So much for democracy and fairness for all where hard work can make you succeed. All you need now it seems is money, size and the politicians behind you.

  2. Sporkfed says:

    Larger banks equal more power and that power will be used
    to control the governments. Instead of creating larger banks,
    we should be breaking them up and increasing regulation.

    • Mike says:

      Amen. However, banksters captured US and EU governments… As Simon Johnson said of theUS government. Whatever is good to protect banksters, allow them gigantic profits, and funnel money to them is now what is done and to h____ with consumers or taxpayers.

      Our system is what you get when the rats are put in charge of the cheese… And we are required to keep supplying it as it runs out.

  3. Jim Graham says:

    Bigger is NOT better.

    • Rates says:

      In the end, bigger will always be worse. Because eventually either an idiot or a bully or both will rise to the top. Either way the shrapnels will fly and it won’t be pleasant.


  4. Some Guy says:

    A few big banks and moderated competition can work (see Canada, Australia, Hong Kong), but you need the right legal/cultural institutions to make it work and you will pay a price in terms of more conservative lending policies

  5. Realist says:

    Who controls Santander ? The trail ends in the US.

  6. caradoc says:

    They will rival governments. Their wants and needs will wag the government dog as their failure will impact all tax payers. BIG MISTAKE.

    in waiting to take on the US and China at their own game the EU will repeat the same mistakes.

    Localisation, multi-tier and responsive to small business is the way forward. Split investment and retail. Get close to local SHE needs. They are heading in the wrong direction imho.

    Following, not leading.

  7. Paul J says:

    The bigger they are the harder they fall. Sadly they also take with them the poor old customers hard earned money, but only after they Directors get their bonuses. Remember Lehman Brothers.

  8. Vinman says:

    why are we replacing too big to fail banks with even bigger too fail banks ? Sounds highly illogical to me .

  9. Dan Romig says:

    Thank you Don for another sober reminder of what’s happening:

    First, “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.'” In other words, we have a well run and solvent bank that can be bought by using leveraged debt, and the buyer can profit by closing down much of it. This would put people out of work (closing down branches) and reduce customer services. Sounds like progress, eh …

    Second, “Senior ECB have repeatedly underscored the need to weed out smaller banks in order to cut competition for bigger lenders.” OK, so what this means is that the ‘free-market’ is no longer even a slogan the ECB stands behind. Nope, the ECB’s Supervisory Board, “blamed fierce competition from smaller banks. Rather than lots of competition between banks, what Europe needs, … are ‘brave banks’ that are willing to conquer new territory.” Conquer new territory??? WTF is that code for? They’re banks; they lend money for purchases like real estate, autos and credit cards, hold deposits and originate loans for businesses.

    But wait, now I see what the ECB wants, ” … 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.”

    Maybe there’s a theme here after all that makes sense: ‘weed out’ and ‘bonus pot’ … Hell, I need to go back to Amsterdam and try that out again.

  10. Rates says:

    I have the simplest of solutions: just make all these banks branches of the ECB formally.

  11. Javert Chip says:

    This is a great idea:

    Take a bunch of European bank managers with a long & painful history of incompetent & semi-criminal behavior, and give them a larger market share so it’s easier for them to “manage” the money.

    What could possibly go wrong? Even the politicians might make money on this.

  12. desmond says:

    things can only get worse…

  13. Steve clayton says:

    Hi DQ, hope ur well. Why would Santander want to takeover a bank that makes no money? , sometimes it’s better to let these small naff banks as mentioned continue. Liberbank has 771 branches and 3,000 ftes. Hardly worth it. DQ are you going to do an article on Puigdemont being arrested and how that will go down in Barcelona?

Comments are closed.