In June, the continuing consolidation of the banking sector in Spain and Portugal is set to move to another level, with the annual general meeting of Banco BPI in Portugal due to consider CaixaBank’s bid to buy the remaining 55.9% of the Portuguese lender it does not already own.
It’s a complicated business. CaixaBank owns 44.1% of the Portuguese bank in which it has held a strategic stake since 1995. But its voting rights are capped at 20%. Now the Spanish bank, one of the big winners from domestic consolidation in Spain, sees that as an unsustainable anomaly. CaixaBank’s hand was forced when BPI stepped forward last year as a bidder for Novo Banco, the good bank carved out of the collapse of Banco Espírito Santo.
Such a bid would almost certainly have required BPI to raise capital, pressing the question of whether its biggest shareholder, CaixaBank, could support any such rights issue with its voting rights still limited.
CaixaBank announced its offer for BPI shares in February at a 27% premium to the previous close, making the offer contingent both on gaining a shareholding above 50% and having the 20% voting cap lifted. That will require support from 75% of BPI shareholders at the AGM on June 17. Getting it looks tricky, given that Santoro Finance, the second-largest shareholder in BPI, with 18.6%, and the vehicle for Isabel dos Santos, daughter of the president of Angola, where BPI has big exposures, appears to have come out against CaixaBank, recommending instead that BPI merge with Millennium BCP.
Analysts wonder if this is just dos Santos’s attempt to push up the price for BPI or an effort to forestall the Portuguese bank from falling into the hands of a Spanish owner that might divest its Angolan operations.
The prospect of CaixaBank picking up a lead position in Portugal through acquiring a merged BPI and Novo Banco receded in April, when BPI did not make it onto the Bank of Portugal’s final list of five potential bidders for Novo Banco.
It’s a confused situation and it might be just as well for CaixaBank shareholders that the Spanish bank is led by a chief executive who knows how to keep his nerve through an M&A battle. Gonzalo Gortázar has been CEO of CaixaBank since June 2014, having been CFO of the Spanish bank from 2009 to 2011. Before that, he spent 16 years as a FIG banker at Morgan Stanley, heading the European FIG group in the darkest days of 2008 and 2009, advising banks across Europe on rescue deals, recapitalizations and restructurings.
| Banking in Portugal is quite similar to banking in Spain and the potential for synergies and scale benefits is clear |
“The outcome with BPI remains to be seen,” Gortázar tells Euromoney. “We have presented what we think will provide the best outcome for all BPI shareholders given the potential for synergies. Banking in Portugal is quite similar to banking in Spain and the potential for synergies and scale benefits is clear. We did not set out with the aim to buy Novo Banco. We want to buy BPI. But the one thing we’re not interested in is keeping the situation as it is, with the gap between our shareholding and voting rights, because that doesn’t make sense for us.”
It’s worth reflecting on CaixaBank’s record as an acquirer. It absorbed Banca Civica and Banco de Valencia during the Spanish savings banks crisis and more recently picked up Barclays Bank SAU, the Spanish subsidiary of the retreating UK bank, which brings another half a million customers, 262 branches and €18.4 billion of loans to a bank that now boasts €356 billion of balance-sheet assets.
Befitting an ex M&A banker, Gortázar is proud of CaixaBank’s prowess as a consolidator.
“We paid 0.5 times book value for Barclays Bank SAU, closed the deal on January 2 2015 and have already integrated its IT systems by mid-May,” he says. “Our track record in delivering costs synergies ahead of schedule through the acquisitions we have made in the past two years gives me a lot of confidence in our ability to repeat the same with Barclays Bank SAU.”
He offers more insights into the bank’s approach: “We have an integration committee that meets every week but we do not have specialist or separate integration teams. Who is responsible for IT integration of acquired banks? The head of IT is responsible. Who is responsible for integration of their branches? The head of the branch network. We are now a much bigger bank than we were pre-crisis, but there is a huge advantage in managing a bank which has all the benefits of scale, but at the same time is still focused on one market. How were we confident, as the only bidder, to take on Banco de Valencia? Why were we happy to take on Barclays Bank SAU? Because we are entirely focused on Spain. We do not have to make choices of where to allocate our capital relative to our home market.” He adds: “The only foreign market we have designs on is Portugal.”
For all that Gortázar declares no interest in overseas markets outside Spain, the bank retains strategic stakes in Erste Group and Bank of East Asia.
Gortázar explains: “Our strategy globally is to follow our Spanish clients as they grow in global markets. Our investments in Erste, GF Inbursa and the Bank of East Asia, which are a sign of long-term financial and management commitment, reinforce cooperation in areas such as trade finance and correspondent banking.” He adds: “The number of global banks is reducing and having alliances with regional leaders is key to unlocking growth opportunities. For example, our consumer finance arm has just supported a joint venture with Bank of East Asia and Brilliance, the Chinese automaker, to provide car loans in China.”
Meanwhile getting CaixaBank’s big bet on Spain to pay off for shareholders now requires sweating the domestic assets it has picked up on the cheap through the crisis and its aftermath. “After so many years in M&A, I can tell you that it is a good thing to do if you don’t have to do it,” Gortázar says.
In its first-quarter 2015 results, the bank reported a return on tangible equity of just 4.4%. Earlier this year, CaixaBank set out a new strategic plan for the years 2015-18 that targets bringing its cost-income ratio down from its present 58% and achieving a return on tangible equity from 2017 of between 12% and 14%. Analysts at Citigroup calculate CaixaBank’s present cost of equity at 9%. Gortázar says: “A key focus for us is to reduce our cost of risk, which currently stands at 1%, down to 0.5% by 2018 and also to bring down that cost-income ratio to 45% which has been temporarily inflated by recent acquisitions.” He adds: “Our strategic plan assumes no further acquisitions. One in four Spaniards already banks with us.”
Perhaps confounding the expectations of some overseas investors that have piled eagerly into the Spanish recovery story since 2013, Gortázar is not pinning his hopes on a big revival in loan growth or an upward repricing of loan margins as banks consolidate. CaixaBank expects the Spanish economy to grow at about 2.5% to 3% in the next few years, but loan portfolio growth to be only 1%.
“Spain needs to see several more quarters of 2.5% growth and strong job creation for confidence to return fully,” Gortázar tells Euromoney. “The targeted LTRO and quantitative easing by the European Central Bank are having a big positive impact on the economy and the corporate sector. Growth in SME loans in the first quarter of 2014 was twice what it was last year, but we do not predict that to continue. The economy will continue to deleverage, and especially the real estate sector. Rather, we aim to reduce the cost of deposit funding and also to continue our remarkable recent increases in market share in pension funds and mutual funds as those attract deposit outflows. On the back book of longer-term deposits we are paying up to 125bp, compared with just 36bp on the front book. On a €70 billion time-deposit base we can see the potential for a €600 million reduction in interest costs.”