Breakingviews - Spanish bank deal is model for battered EU lenders

A man walks past a Caixa bank branch in Barcelona, Spain October 6, 2017. R

LONDON (Reuters Breakingviews) - Spanish banks are taking a lead where many European Union rivals have feared to tread. Caixabank and state-backed Bankia on Thursday evening announced they were in talks about a deal that would create the country’s largest domestic lender with 664 billion euros of assets. The in-market union offers the best way to protect earnings from the effects of negative interest rates and pandemic-induced bad debts.

Though details are scarce, the Spanish government expects that its 62% stake in Bankia - the consequence of a state bailout in 2012 - would shrink to around 14% of the combined entity, sources with knowledge of the matter told Reuters. That implies the much bigger Caixabank is offering little, if any, premium for what would effectively be a takeover.

The move looks opportunistic given Spain’s bruising recession. Even after a one-quarter surge on Friday morning, Bankia shares are valued at just 0.3 times the bank’s tangible book value, well below Caixabank’s at 0.6 times.

Still, the deal makes eminent sense. The combined Caixa-Bankia would have 30% of the Spanish market according to analysts at Jefferies, leapfrogging Banco Santander. Closing overlapping branches and ripping out other duplicated costs would bolster profitability. Assume Caixabank could cut Bankia’s 2019 operating expenses by 40%. Taxed and capitalised, those synergies would have a present value of around 4 billion euros, according to a Breakingviews calculation which assumes 1.8 billion euros of integration costs. That’s roughly equivalent to Bankia’s current market value.

As of Friday morning, Bankia was worth 8.5 billion euros less than its tangible book value at the end of June. A deal struck at that price would create a capital gain that could help cover integration costs and – if regulators permit – boost Caixabank’s 12.3% common equity Tier 1 capital ratio.

Given the Spanish government’s involvement, Caixabank Chief Executive Gonzalo Gortazar will face a tricky task pushing through branch closures and job losses. But the pandemic’s ongoing fallout makes the pressure for consolidation hard to resist. Spain has tended to lead the European countries in encouraging domestic bank mergers. Other EU countries should take note.


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