If the approach made by Abanca to Liberbank and some of its key shareholders had set the cat amongst the proverbial pigeons when it emerged on 22 February, its withdrawal on 26 February based on Abanca’s inability to gain access to Liberbank’s books to conduct proper due diligence faced with the CNMV’s 10-day formal bid deadline was by any stretch peculiar.

Sentiment had always appeared to be against Abanca’s non-binding 56 cents a share approach succeeding, since in making the unsolicited approach Abanca had put itself up against Malaga-based Unicaja Banco for control of Liberbank.

Due-diligence on that tie-up is progressing, and expectations are for a deal to be put together to present to stakeholders in coming weeks, following confirmations from Unicaja and Liberbank in December 2018 that preliminary contact had been made with a view to a merger. On their respective Q4 earnings calls in early February, Liberbank CEO Manuel Menéndez and his counterpart at Unicaja Enrique Sánchez took a clearly co-ordinated ‘no comment’ approach; Menéndez saying nothing more than contracts are “currently on their way” and Sánchez confirming contact between two the banks was ongoing.

Beyond the most recent news flow, general bank merger or takeover speculation in Spain is a constant; most attention being focused on a mid-sized grouping of Bankinter, Kuxtabank, Unicaja, Abanca, Liberbank, Ibercaja and (to a lesser extent and in a slightly different guise) Cajamar Caja Rural.

“While we acknowledge that we are reaching the tail end of the consolidation process, we still believe there are opportunities. There is very little overlap between the remaining regional bank franchises, which could seek to merge as a way to diversify and enlarge their business. We also see some of the larger banks such as Bankia and Sabadell possibly looking at M&A to round out their uneven franchises,” Marco Troiano, executive director in the financial institutions team of Scope Ratings had noted in a 6 February report (“Spanish banks: five key credit themes for 2019”).

To that latter point, not even the country’s biggest institutions are spared: BBVA-Bankia or Sabadell-Bankia tie-ups have also been the subject of media speculation.

Scale is certainly one outcome of a merger between banks in this mid-sized regional group. Many of the several possible merger permutations among this grouping would push the resultant organisation up the size scale to sixth by assets, behind Sabadell and the big four (Santander, BBVA, Caixabank and Bankia).

“This is about much more than achieving scale for the sake of scale. The key strategic driver of consolidation among Spanish regional banks is the ability to create greater investment capacity for digitalisation. This is not a trivial matter: without that capacity, stand-alone regional banks will be unable to withstand competition from the county’s largest banks in an era of rapidly changing customer behaviour,” Troiano said in the wake of the Abanca news.

“This eclipses the benefits of either cost savings or revenue synergies. There is certainly room for cutting costs in central functions but there is very limited overlap in branch networks, given the broadly regional nature of much of Spain’s banking sector,” Troiano continued. “As for revenue synergies, these can be delivered only to the extent where one bank has a successful niche business that can be successfully rolled out to another bank’s customer base.”

There are some potential impediments to M&A. Governance is one, more specifically dealing with the reductions in management and employee headcount. Any merger would also need to gain supervisory approval, although this aspect is typically related to core operational issues around capital, which in particular becomes a major issue if shareholders want out and banks need to stump up cash.

“We see in-market consolidation as positive, especially between smaller-sized regional banks, as it allows banks to scale up their digital distribution efforts and compete with larger players on a more equal footing. If the Spanish banking crisis has a silver lining, it lies in the in-market consolidation of the sector, which has allowed a material rationalisation in cost structures and freed up budgets for much-needed investments in digital distribution,” Troiano noted in Scope’s 6 February report.

Notes

ABANCA Corporación Bancaria was formed following the takeover by Spain’s Banco Etcheverría (owned by Venezuela’s Banesco and its Spanish-born chairman Juan Carlos Escotet) of NCG Banco. NCG had been created from the prior merger of Caixa de Aforros de Galicia, Vigo, Ourense e Pontevedra (a.k.a Caixanova) and Caixa Galicia. NCG’s operations outside of its home region of Galicia were spun off into a separate brand – EVO Banco. EVO was initially sold to US private equity firm Apollo and was subsequently acquired by Bankinter in 2018.

Liberbank is an amalgam of Caja de Ahorros de Asturias, Caja de Ahorros y Monte de Piedad de Extremadura, and Caja de Ahorros de Santander y Cantabria. The group completed its takeover of takeover of Banco de Castilla-La Mancha in 2018. It has been listed on the Madrid stock exchange since 2013.

Unicaja completed its Madrid listing in 2017, concurrent with a EUR 756m stock offering. The former Monte de Piedad y Caja de Ahorros de Ronda, Cádiz, Almería, Málaga y Antequera had been founded in the 1990s through the merger of savings banks from each of the five locations in its name. Unicaja acquired Banco CEISS (the former Caja España de Inversiones, Salamanca y Soria, Caja de Ahorros y Monte de Piedad, a.k.a Caja España-Duero) in 2018.

 Author: Keith Mullin: k.Mullin@scopegroup.com