Spanish banking: Santander swoops

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A big depositor run in Spain spells trouble for some – but the country’s biggest bank thinks it has spotted an opportunity.

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The bail-in of equity and subordinated debt holders in Banco Popular in early June crystallized one of the biggest financial risks in Europe. But for Banco Santander, it has been a surprisingly positive development. 

Santander’s chairman Ana Botín is clearly doing no one a favour – let alone rivals – with the purely symbolic €1 paid for Popular, after its additional tier-1 and tier-2 debt was wiped out. Santander’s shares rose by 7% in the following days; three weeks later they were still up 3%.

It is not for free. Santander says the purchase is capital neutral in the short term, yet shareholders are being asked to stump up another €7 billion to fund €7.9 billion in additional provisions against Popular’s non-performing assets, mostly real estate. The funds will be used to bring Popular’s coverage ratio from 45% to 69%, well above the sector average, which suggests fears that Popular’s balance sheet is even worse than its 25% non-performing loan ratio might imply.

If there are benefits for Santander, it is because Popular was Spain’s biggest small and medium-sized enterprise bank, with a market share of almost 14%. While the acquisition increases Santander’s market share of overall Spanish loans from 12.3% to 19.5%, it more than doubles its market share in SMEs in Spain to 25%. It, therefore, not only gives Santander the biggest share of the domestic banking market, it also makes it by far the market leader in the currently most sought-after segment.

Temptation

Thanks to SMEs, Popular’s interest margins were already well ahead of banks with bigger mortgage market shares, such as Bankia. It also has bigger market shares in richer regions, like Galicia. The downfall of Popular and its long-standing former chairman Angel Ron (only dislodged late last year) was succumbing to the temptation to stray from that core franchise into financing real-estate development in the mid 2000s. Ron then failed to raise more capital soon enough. 

Santander hopes the acquisition will afford Popular bankers better scope for cross selling, improved toxic debt-disposal capacity and certainly much less expensive wholesale funding. 

Moreover, it could be at the right time in the economic cycle in Spain (unlike, perhaps, in the UK where Santander has passed on acquisition possibilities).

The bail-in is a reminder that there are still risks around Spanish banks’ legacy assets – now in much smaller lenders. Popular’s downfall has put even more pressure on Liberbank and Cajamar’s bonds. 

As consolidation increases in Spain, Popular will not be the last small lender to be subsumed into a bigger rival, as the merger of Bankia and BMN shows.