Spain’s saving banks seek new funding strategies

SPANISH COMMERCIAL BANKS such as Santander and BBVA are world famous for their expertise in retail banking but at home they have been steadily losing market share for the past 20 years to the country’s cajas de ahorros – local foundation-owned savings banks. Since being set free to expand outside their home regions, these banks, which have no shareholders but which must give a significant proportion of their profits to community and charitable causes, have doubled their share of the national market from about a quarter to almost half, eating up 20% of the commercial banks’ market share and surpassing their combined influence in the process.

Their expansion has been fed by a decade of rapid loan growth and an aggressive programme of new branch openings, paid for by a growing deposit base, plenty of retained profits and hundreds of billions of euros-worth of cédulas, or covered bonds.

But Spain’s deflating construction and property bubble promises to halve the annual rate of loan growth from more than 20% to something more like 10% or 12%. A rise in non-performing loans also seems inevitable. With no high-growth foreign businesses to fall back on, the cajas will be hit harder by the domestic slowdown than Spain’s commercial banks, which have been fleeing to Latin America and other foreign markets since the 1990s.

Unlike their commercial bank competitors, the cajas are also faced with special problems with raising capital because they have no equity to issue and their favourite capital market instrument, the cédula, has become a lot more expensive to issue since the US sub-prime market crisis infected the wider international credit markets.

Faced with these problems the Spanish savings banks are being forced to examine alternative ways of raising capital and to re-examine their growth strategies.

Spain’s largest caja – Caja de Ahorros y Pensiones de Barcelona, La Caixa, the country’s third-largest financial institution with €209.1 billion in assets – brought attention to the issues facing the sector when it launched the IPO of a holding company it created to hold its massive €25 billion investment portfolio this October.

Criteria Caixa, as the company is called, contains La Caixa’s significant holdings in Spanish blue chips, including infrastructure company Albertis (25%), Gas Natural (35.5%), oil and gas company Repsol (12.5%) and Telefónica (5.4%), as well as some unlisted companies and the bank’s own insurance business. The deal raised more than €4 billion after the exercise of a greenshoe or over-allotment option this November, and is the largest-ever IPO on the Madrid stock exchange and the second-largest IPO in the world this year. Criteria Caixa is now the seventh-largest stock on the Madrid stock exchange.

Having expanded aggressively over the past 10 years at home and created the largest branch network in Spain, La Caixa’s ability to maintain growth amidst a domestic slowdown will be limited unless it can expand overseas. Although the bank has dabbled in international expansion before – most notably with its 25% stake in Portugal’s BPI and its recent purchase of a 4% holding in Bank of East Asia, a large Hong Kong bank with an extensive network on the Chinese mainland – its overseas ambitions, like those of all cajas, are hampered by its inability to raise equity and by restrictions imposed on cajas by the Banco de España. The central bank will not allow any caja to take control of a foreign bank unless it has a stock exchange-listed vehicle because it wants the market to judge the merits of any such strategy.

The Criteria Caixa deal makes La Caixa the first caja with a listed vehicle that would meet the central bank’s requirements, freeing it to take control of a foreign bank should it choose to do so.

Juan Maria Nin, La Caixa’s charismatic CEO, says he does not rule out the possibility that Criteria could make such acquisitions but says that the listed company’s strategy is to gradually reweight its portfolio away from industrials towards financial services by building sizeable stakes in selected companies, particularly in eastern Europe, Asia and the US that would give La Caixa influence over strategy. The strategy should create value for investors in Criteria because financial holding companies tend to trade at a lower discount to net asset value than industrial ones.

Although the strategic rationale of the transaction for La Caixa is more to enable it to pursue a strategy of international expansion in order to offset slowing domestic growth than to raise capital per se – La Caixa is already a net lender in the interbank markets – the use of its equity portfolio to raise cash is proving inspirational to other cajas, even those with no international ambitions.

Contagion from the US sub-prime crisis and fears about Spain’s own real estate and construction problems have hit the cajas because the spreads on their preferred funding instrument, mortgage-backed cédulas, have gapped since the summer, unfairly in the opinion of Spanish bankers, pushing up their funding costs.

Santander, which this November became the first cédula issuer since the summer, paid 12 basis points compared with just 2bp to 3bp on previous deals. Other issuers, such as Banco Popular, which suffered a 21% rise in bad loans between September 2006 and September 2007, have decided to delay deals until conditions improve. Bankers estimate that billions of euros of issuance have been put on hold. Year to date, cédula issuance has fallen 15% on the same period in 2006 to reach €47.5 billion.

New forms of funding

The unattractive conditions in the credit market have forced the cajas to start looking at alternative ways of raising capital and that has put the spotlight on their portfolios of listed and unlisted companies, which are estimated to be worth about €55 billion.