Privatization has been the fate of all but a few of Europe’s unquoted financial institutions. Demutualization is all the rage. Non-shareholder banking models are few and far between, but Spain is a notable exception. Here, the private savings banks are growing and consolidating and show no signs of letting go of their special legal status. The Spanish savings bank model has virtually no critics. It has proved itself a successful structure because of a number of features. Most notably, since the creation of these unique financial institutions over a century ago, there has not been a single default.
The savings banks – cajas – have managed to adapt to a changing economic and banking environment and, concentrating on their retail banking business, have strengthened their regional positions and continued to grow market share in deposit and credit business nationwide.
Despite a slowdown in economic growth throughout the eurozone in 2001, the savings banks have reported increased profits for the first quarter. The largest of them, Caja de Ahorros y Pensiones de Barcelona (La Caixa), reported post-tax profits up about 15% to Pts37.4 billion ($190 million) on the previous year. The second largest, the Caja de Ahorros y Monte de Piedad de Madrid (Caja Madrid), reported a rise of 15.6% to Pts18 billion, thanks to continued loan growth. President of La Caixa, José Vilarasau, expects loan portfolios to continue growing throughout 2001. “We have not noticed any deceleration so far this year,” he says.
Spanish savings banks have a unique structure in that they do not have shareholders or even members. These private financial institutions are not actually owned by anyone but are run by the equivalent of a board of directors, elected by a general assembly made up of representatives from the savings bank’s employees, depositors, local government and local corporation representatives. The balance of representation by each group varies between cajas, but the principle of local representation applies to all.
The savings banks were founded to promote the regions and offer credit to lower-income segments that wouldn’t otherwise receive it. This is the basis for their continued appeal: all savings banks are regionally based and close to their clients and have been able to develop and maintain strong local franchises. A personalized service is the overriding philosophy and the savings banks have focused on creating dense branch distribution networks, which extend to rural areas considered unprofitable by the private banks.
In addition to focusing on customer service, the savings banks have maintained a loyal customer base because of their contribution to local social projects. Instead of distributing profits to shareholders, each savings bank is free to allocate up to 50% of its annual post-tax profits to finance social works – although the average has tended to be around 25% in recent years.
In 1988 the law changed and the savings banks were allowed to expand outside their home regions for the first time. This stimulated a string of mergers – the total number of savings banks has fallen from 78 in 1998 to 48 today – to create larger and stronger regional institutions with increased market shares. The two savings banks from the richest areas of Spain, La Caixa and Caja Madrid, from Catalonia and Madrid respectively, were quick to take advantage of this liberalization. Both expanded rapidly throughout the 1990s – not just into neighbouring regions as other savings banks have done – and are now the third- and fourth-largest banking institutions in the country after the newly-merged commercial banking giants Banco Santander Central Hispano (BSCH) and Banco Bilbao Vizcaya Argentaria (BBVA).
The savings banks tend to be very liquid. So not being able to go to the capital markets for funds for expansion projects has not proved to be a restriction as yet. Although commercial bank branch networks have been contracting since the mid 1990s – notably following the two big mergers – the number of savings bank branches has risen. Over 4,000 new savings bank branches have opened since 1990, to reach 19,295 by the end of 2000 compared with only 15,745 bank branches. Logic would suggest such an expansion can only hurt profitability.
In terms of credit quality analysts believe that the savings bank structure has its advantages. “Creditworthiness can often deteriorate with shareholder pressure,” points out Angela Cruz of Standard&Poor’s. S&P’s only concern about credit quality is that the savings banks are expanding into less well known areas of business. This has not, as yet, resulted in higher non-performing loan ratios, though. La Caixa, which is responsible for most of this expansion, maintains a non-performing loans-to-total loans ratio below 1%, as does Caja Madrid, although, notably, BBVA’s is 1.91%.
The savings banks’ non-performing loan ratios generally are at historically low levels and have been falling since 1993 as real GDP growth has risen in Spain. Such low levels of bad loans are also best explained with reference to the savings banks’ locally based structure. “They know their customers very well. They can therefore be professional in their assessment of risk,” says Pedro Pablo Villasante, the director of banking supervision at Spain’s central bank, the Banco de España.
La Caixa’s efficiency ratios have, however, been affected by its expansion, increasing from 60.6% to 62.9% in 1999 before falling to 56.7% at the end of March 2001. This compares with Caja Madrid’s 40.5%. The savings bank average at the end of 2000 was 65.7%, worse than the commercial bank average of 62% – for activities in Spain only – but an improvement over the savings bank efficiency ratio at the end of 1999. And, although the savings banks’ efficiency ratios are poor by Spanish banking standards, they still compare well with other financial systems in Europe.
Interest margins – traditionally very high in Spain and the savings banks’ main source of income – have declined significantly as Spanish interest rates converged with European levels. “Margins have been significantly reduced throughout the 1990s and the entire banking system has adapted well to this pressure,” says Cruz. One way of coping, adopted by the larger savings banks, has been to move into asset management and other fee and commission-based businesses.
With adaptation and expansion in mind, many savings banks have also increased their industrial equity investments, which has heightened their risk profile, as was noted recently by the central bank governor, Jaime Caruana. At the annual meeting of the savings banks confederation, Ceca, in April, he warned that substantial shares in industrial holdings have “additional responsibilities” and that if they “exceed certain limits or reach relatively important proportions, they go against the savings banks’ objectives and their very nature”. He also pointed out that having these high-risk holdings obliges the savings banks to issue hybrid instruments which “does not seem natural for an entity which has the character of a foundation”.
As is the case with commercial banks, the savings banks have the option of raising funds through fully-owned subsidiaries, which issue preference shares on their behalf. These shares are considered tier one capital by the regulator, so they can be used to help maintain solvency levels as risky assets increase. There is no legal limit on the use of these high-leverage instruments but the Banco de España recommends no more than 30% of the savings banks’ own accumulated reserves.
There’s no doubt that savings banks have lower financial flexibility than publicly-quoted banks and this will probably restrict further expansion, particularly outside Spain. But the savings banks don’t seem too worried. “Until 1990 we couldn’t have offices outside Catalonia,” says La Caixa president Vilarasau. “Since then, we have expanded and opened new offices throughout Spain. Now we want to concentrate to make sure that these offices do well. We have only a very small presence abroad, although we have lots of investments, and there are no plans to increase the number of offices outside Spain in the next year.”
Nor is greater European integration a worry for these savings institutions. Retail banking is universally difficult for foreign banks to penetrate, but particularly so in Spain, where brand names and regional loyalties are strong and dense savings bank branch networks present a significant barrier to entry. “Branches continue to be an important way of attracting clients, even though new channels have arisen, like the internet,” says Villasante. Given the savings banks’ excellent record of growth, profitability, improving efficiency, expansion and credit quality, it seems unlikely that these entities will disappear like the majority of their British, Danish and Italian relations have. Neither the customers nor the government is in favour of privatizing them.
