Fitch: Spanish Banks Consolidate, Growth Drives CaixaBank Deal

Tue Sep 2, 2014 7:45am EDT

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(The following statement was released by the rating agency) LONDON, September 02 (Fitch) CaixaBank's acquisition of Barclays' Spanish business highlights how the search for growth is driving further consolidation in Spain's banking sector, Fitch Ratings says. A smaller number of more efficient and viable banks should place the banking sector's financial stability in a better position. The transaction is neutral for the ratings of CaixaBank and Barclays. Growth and scale are important for Spanish banks in the tough, but improving, operating environment. Barclays' Spanish operations will reinforce CaixaBank's presence in wealth management and affluent segments, especially in and around Madrid, and re-establish the bank as domestic market leader for loans and customer funds. BBVA temporarily took the position after the Catalunya Banc acquisition announced in July 2014. Execution risks from this deal should be manageable because CaixaBank has gained substantial experience integrating banks over the last four years, some of which were much larger than the acquired businesses of Barclays Spain. The acquisition is in Fitch's view small at 6% of CaixaBank's pro-forma assets and largely includes low-risk, low-margin residential loans. The ten-month timeframe for integration is in line with what has been delivered in previous transactions. The cost savings target appears challenging since the bank aims to cut around 42% of Barclays Spain's annualised costs. Nevertheless, CaixaBank has delivered on cost reductions before and it makes sense to aim to bring down Barclays Spain's 90% cost-to-income ratio down to around an estimated 50%, with EUR150m of annual cost savings. CaixaBank will be looking to leverage its enhanced wealth and affluent franchises. Income synergies could come from cross-selling CaixaBank's broader product range and improving the margin on Barclays Spain's mortgage-dominated portfolio by taking advantage of CaixaBank's lower retail funding costs. But we are generally more sceptical about revenue benefits from consolidation, especially in a still weak economy. The price for the transaction is below book value, despite the high coverage on non-performing loans. This generates negative goodwill, which will be mainly used to front-load restructuring costs and credit provisions at the acquired unit. The transaction weakens CaixaBank's capitalisation, although we believe it will remain sound with a Basel III fully-loaded common equity Tier 1 ratio of 11.6% on a pro-forma basis, and will be boosted by profit generation, as has been the case over recent quarters. The deal involving Barclays' retail, wealth and corporate banking businesses in Spain was announced on 31 August and is still subject to regulatory approvals, which are expected in early 2015. Barclays designated these operations as non-core in May and the deal demonstrates the group's commitment to follow through the strategy swiftly. Barclays' Spanish subsidiary is not subject to the ECB's comprehensive assessment. Barclays also has an Italian branch network up for sale, which is included on the latest list of significant banks to be supervised by the ECB. Contact: Josep Colomer Director Financial Institutions +34 93 323 8416 Christian Scarafia Senior Director Financial Institutions +44 20 3530 1012 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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