Cajas and shares

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Spain's savings banks have decided to dip their toes in the uncharted waters of the market by issuing shares, a move that could eventually hasten the privatization of the 48 cajas de ahorros that account for half the country's financial system.
Caixa Galicia, one of the top five savings banks, has taken the first timid step by approving the issuance of up to Pta25 billion ($142 million) in non-voting shares that will be available to bank customers and employees.
There is growing domestic and foreign pressure for the cajas to open up to private capital.
The IMF and OECD have made recommendations in favour of privatizing the sector and even the powerful Spanish business confederation Círculo de Empresarios says it is wrong for "half of Spain's financial system to be lacking ownership and under the control of political parties".

The cajas have been ruthlessly exploiting their privileged mutual status which protects them from takeover by banks, but allows them to snap up their bank rivals, as was seen in the past couple of years with the acquisition of the Spanish operations of Abbey National and a local Deutsche Bank subsidiary. "Their status makes a mockery of the level playing Weld concept," says a Madrid banker. The cajas' boards are made up of local councillors of the party in power in each region.
Politicians use the cajas as a source of soft loans to local enterprises and to lend support to officials appointed to privatized companies. The political control is such that the regional government of Cantabria recently sacked the chairman of the local caja by decree.
The Bank of Spain's deputy governor, Miguel Martín, has waded in with a demand that the regional governments exercise control to prevent the cajas from becoming "a battlefield" and a tool for achieving political objectives. Finance minister Rodrigo Rato echoed the central bank's anger over the cajas' political manoeuvring by calling for "the most professional degree of management possible" as well as flexibility to merge with cajas outside their home regions.
As mutual societies, the cajas' main sources of raising equity have been the issuance of subordinated debt and non-voting preference shares. Since last year the cajas have issued e2.7 billion in preference shares and e210 million in subordinated debt. The larger cajas are facing massive outlays of capital to keep pace with the banks. Javier Egaña, deputy director of the Basque Country's caja, BBK, estimates that the sector will have to revise its profit estimates downward by 16% over the next Five years just to meet its planned investment in internet banking and e-commerce.
The most obvious route out of this dilemma would of course be through a sell-off to the private sector, a morsel that investment bankers say could represent up to Pta10 trillion in privatization receipts. But prime minister José María Aznar's centre-right government has made it clear that this alternative is not on the cards for its current term of office, which expires in 2004.
The cajas, not surprisingly, have turned a deaf ear to any talk of privatization. They are aware that with a shareholder structure in place they would become tempting targets for the banks. Hence it looks as if the only way the market is going to gain access to the cajas is through the issuance of so-called "cuotas participativas", or non-voting shares.
Spain's association of cajas, CECA, is keeping a close eye on Norway, where 21 of the country's 132 savings banks have successfully launched share issues without jeopardizing their mutual status. A Norwegian delegation was in Madrid recently to explain its strategy to representatives of the leading Spanish cajas. A director of one of the cajas says that Norway is an example to emulate, since the share issue exercise has enabled its savings banks "to increase their efficiency by submitting themselves to a constant market scrutiny".
However, the market is sceptical that the issuance of a limited number of non-voting shares can work as a viable substitute for a public listing. "They are run by politicians, they pay no dividends and they have no track record in creating value for shareholders," says Iñigo Lecubarri, European banking analyst at Schroder Salomon Smith Barney. Lecubarri says there is value in some of the largest institutions but these would be very wary about bringing in institutional shareholders.
As investors would not be paid a dividend they would want to agree a process of privatization as well as a voice on the board. The proposals now under review by CECA contemplate setting a 10% cap on any single shareholder.
One of the incentives for the investor in the longer term is to gain access to a highly fragmented industry that is ripe for massive consolidation and which itself recognizes the need to rationalize its network. The Bank of Spain is backing this initiative, with a view to eventually trimming the sector to one caja for each of the country's 17 autonomous regions. "We would be delighted to see a process of rationalization among the cajas and this will be necessary in the future, but it is a very sticky issue and I don't see any easy solution," says Ramón Ferraz, director of planning at Caja Madrid, Spain's second largest.
Those who are pushing for rationalization point out that a slimmed down sector would enable the cajas to share technology, as well as develop an efficient system of customer segmentation and joint marketing, crucial factors in the drive to bring down costs. It has been estimated that with their top-heavy cost structures an average caja is facing a level of expenditure to run 150 regional branches similar to what BBVA, the country's biggest bank, spends on supporting its 3,000 plus network.
Some of the cajas rival the big banks in the size and scope of their operations, but not many of them in performance. Barcelona-based Caixa Catalunya, for instance, the third-biggest, boasts assets of e22.3 billion. But its 12.1% return on equity and 73% cost/income ratio sets it well behind the best of the banking sector.
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No. 6: If you don’t give it to me you’ll only lend it to someone else and look where that got us

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Cajas and shares

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