TEXT-Fitch:M&A opportunities to benefit healthier Spanish banks

Tue Nov 27, 2012 3:35am EST

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(The following statement was released by the rating agency)

Nov 27 - The proposed acquisition by Banco de Sabadell of Banco Mare Nostrum's retail banking operations in two Spanish regions highlights opportunities for stronger institutions to acquire assets put up for sale by banks with weaker balance sheets in Spain, Fitch Ratings says. We believe further M&A activity is likely over the next few quarters as the different banks clean up, restructure and strengthen their balance sheets.

Resilient banks will take advantage of others that are receiving state aid and shedding businesses as part of their restructuring plans. We expect banks being bailed out to come down in size by at least 25%, and follow the path of Irish and Greek banks in deleveraging and sector consolidation.

Further consolidation is positive for banking sector stability and our ratings for Spanish banks in the medium-term, provided that transactions are prudently funded and do not stretch the financial profiles of the acquiring banks. A smaller number of more efficient and viable banks should have a greater capacity to absorb losses from Spain's sovereign and real estate crisis together with the backdrop of weak economic prospects.

Continued restructuring, resulting in a stronger sector, could restore the confidence of depositors and debt investors, and reduce Spanish banks' dependence on extraordinary liquidity from the European Central Bank. But uncertainties remain about the impact on Spanish banks of the broader eurozone crisis and macro-economic environment that could hinder the recapitalisation and transformation of the sector.

Scale is increasingly important for the Spanish banks in the tough operating environment where the real-estate market has collapsed and funding costs are high. Larger institutions should benefit from cost synergies from the optimisation of branch, staff, IT and shared-services. The cost-control discipline of Spanish banks before and during the crisis, gives us comfort that cost synergies will emerge after upfront restructuring costs are taken. But we are more sceptical about revenue benefits from further consolidation, especially with business activity subdued in the recession.

A smaller number of Spanish banks could lower funding costs in the short term, as competition for deposits may ease with fewer participants. However, we believe overall funding costs are likely to remain high for some time, as it may take several years for Spanish banks' access to the interbank and wholesale markets to return to normal.

On 13 November, Banco de Sabadell announced it had reached an agreement to acquire Banco Mare Nostrum's retail banking operations in the north-eastern regions of Catalonia and Aragon. The transaction involves a 461-branch network, with loans of EUR11.1bn and deposits of EUR8.8bn.

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