BANKS DO NOT often give a hearty welcome to government legislation aimed at regulating the financial services sector. Spain’s new finance law, which is expected to be approved by parliament after the summer recess, is an exception. It has been enthusiastically embraced by the 46 cajas de ahorros – the savings banks that account for half the country’s banking system. As far as the cajas are concerned, the law hands them their cake with a clear mandate to eat it as well.
The cajas have been operating since the mid-19th century and for most of that time were viewed as stodgy, almost clerical institutions that were not taken seriously by the commercial banks. That is, not until 1977 when the government introduced legislation that allowed these private foundations to offer their predominantly working-class customers the same products and services as the banks.
Quality services “The common perception that the cajas, being quasi-public institutions, should be inefficient, unprofitable and poorly managed is not accurate at all,” says Boris Molina, an analyst at Santander Central Hispano Investment. “Delivering steady and reliable growth in their social dividends, as well as ensuring the quality of the services they provide, are key objectives for the cajas. Historically, their return on equity and net interest margins have been higher than those of banks and the growth picture continues to be tilted towards them.”
The Spanish private-sector banks have been a success story in Europe. But in future, it’s the cajas that might benefit most, Molina believes. “Given the sheer momentum of their expansion plans, combined with their lower cost structures and large exposure to the faster-growth mortgage sector, we would expect the cajas to grow their asset bases faster than banks over the next three years.”
The cajas have overtaken the banks in lucrative markets such as mortgage loans and have achieved a higher overall return on equity. Their share of consumer lending has risen from 18% to 50% over the past 25 years.
One of the cajas’ competitive advantages is their high esteem in the public eye. Although such bankers as Mario Conde, the former chief executive of Banesto, are serving time for fraud, and others at Spain’s top banks have been fingered in various scandals, the cajas are regarded as honest and trustworthy.
“You really can’t say anything bad about the large savings banks like La Caixa or Caja Madrid,” says Norman Bernard, director of First Consulting. Given that they are big honey pots and looked upon avariciously by politicians to support their causes, the cajas have kept their reputations wonderfully clean.
Bernard says: “They are not the scandal-ridden institutions one would expect from banks with the muscle to construct dams and make large donations to people’s favourite charities. They are also good at not getting burdened with big corporate loans and they have studiously avoided going to places like Latin America.”
The cajas’ reputation is also enhanced by their charitable status. They are required by law to donate at least 25% of their net profit to social causes, which last year amounted to e1 billion. As such, they are viewed by most of their customers as benevolent institutions.
“A key to our success is that we have been able to keep our status as private foundations engaged in commercial banking activities, while donating a large portion of our profits to charity,” says Juan Ramón Quintás, chairman of CECA, the umbrella association for Spain’s cajas (see interview, on page 132).
But the cajas’ real trump card is the fact that they aren’t obliged to be looking over their shoulders at their share price every day. This means that they enjoy a degree of strategic and tactical flexibility and an ability to cope with market turbulence that would be unthinkable for any of the large quoted banks. “They have been opening branches at an almost marathon pace in the past few years,” says a Madrid banker. “But when the market takes a nosedive they can just as quickly shut them down.”
The new finance law will provide the cajas with a more market-friendly management structure as well as opportunities to reinforce and grow their capital base. Although the most eye-catching feature of the law is the creation of non-voting shares, called cuotas participativas, the government’s main efforts are aimed at easing political control in the cajas’ management structure.
The cajas are a key financing vehicle for Spain’s 17 autonomous regions. Local governments and town councils appoint board members who exercise majority control, with a minority representation normally of customer associations and trade union members. The government uses the cajas to provide soft loans to local enterprises and also to lend support to officials who have been appointed to newly privatized companies. The new law imposes tighter limitations on the number of politicians who can sit on the board, as well as their term of office.
This move to promote a more professional management structure has been widely applauded, but the non-voting shares have raised some hackles in the market. The cajas rely primarily on preference shares and subordinated debt to fund loan growth and provide capital for investment in the equity market. These two instruments account for nearly half of the cajas’ total capital raising over the past eight years. “The main concern involves limited core capital growth, given that ROE is expected to be in the 12% to 13% range and payouts at around 26%,” says Santander’s Molina. “With preferred stock already beyond the 30% limit, some cajas may find that non-voting share issues, which rank as tier 1 capital, are an attractive, if not the only source of additional funds.”
The trouble is that from the cajas’ perspective, non-voting shares are an expensive form of capital raising, while for investors, exposure to a company’s risk without any say in the management may be less attractive than the traditional bank equity market.
“The cuotas participativas are a version of the golden share,” says First Consulting’s Bernard. “There ought not to be non-voting equity because this is a business-risk issue that goes against the principle of corporate capital. The cajas should turn to the public capital markets and accept the rule that if a certain amount of your shares falls into somebody’s hands, you can be taken over.”
However, that goes against the spirit of the new law, which takes pains to preserve the cajas’ unique structure as private foundations engaged in banking activities. In any event, in the short term the new instrument is likely to appeal mainly to the less well capitalized cajas.
“The less efficient ones are the most likely to issue participating stakes,” says Albert Coll, banking analyst at Citigroup. “Lending growth for the system will be around 9% this year, driven mainly by mortgages, and with weak deposit growth still in place, savings banks need to find alternative sources of funding. But the proposed instrument is an expensive one to issue and it is unlikely to appeal to cajas such as La Caixa.”
The largest cajas, notably La Caixa and Caja Madrid, say that they are looking at the cuotas participativas but so far neither of them has given any indication of issuance in the near term. The cajas have been able to fund themselves comfortably in the international capital markets through the issue of jumbo mortgage-backed bonds known as cédulas hipotecarias and their EMTN programmes. Caja Madrid, for instance, this year will issue e3.3 billion in cédulas euros and e3.08 billion in MTNs.
“We did 11 private placements in the first quarter through our EMTN programme, in euros, sterling and dollars,” says Carlos Stilianopoulos, Caja Madrid’s head of capital markets. “We consider ourselves to be market innovators and this year we plan to take our cédulas hipotecarias to the Asian market where we would like to place about 25% of this year’s issuance.”
Call for level playing field Critics of the new law say that if the cajas are going to be issuing shares and competing with the banks in the international capital markets as well as in every other part of the business, they should have to face the same market risks and give up their privileged status as private foundations.
The IMF and OECD have made recommendations in favour of privatizing the sector and even the powerful Spanish businessmen’s association, 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”. But as far as the cajas and the government are concerned, privatization is not on the cards. The cajas, which are protected from takeover, don’t want it and there is also the fear of being pulled into the gravitational field of Madrid and the central government.
“When looking at the savings banks in Spain it is important to understand the political environment and the regional rivalry,” says Citigroup’s Coll. One clear example is Madrid versus Barcelona. Barcelona-based La Caixa is Spain’s third-largest financial institution and its management doesn’t like the idea of losing its regional identity, which is partly what happened to BBVA, where its roots are in northern Spain but the seat of power has been gradually transferred to Madrid following the merger with Argentaria.
So the cajas get a new instrument for raising capital, less government interference, and they also remain immune to takeover. Small wonder, as one Madrid banker says: “Ask anyone at SCH or BBVA about their worst nightmare and the reply is certain to be ‘the cajas'”.
