The history of Spanish banks can be explained as the game of the snake that eats until it gets bigger and bigger. In the penultimate chapter of that story, BBVA has proposed to Sabadell to unite both entities to form a bank that competes for leadership in the Spanish market and can rub shoulders with the major Europeans. But it is an operation that still has many unknowns to resolve to be completed, including a war…

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The history of Spanish banks can be explained as the game of the snake that eats until it gets bigger and bigger. In the penultimate chapter of that story, BBVA has proposed to Sabadell to unite both entities to form a bank that competes for leadership in the Spanish market and can rub shoulders with the major Europeans. But it is an operation that still has many unknowns to resolve before it can be completed, including a war over the value given to each bank and a battle over the distribution of power between the directors of both entities.

A bank merger always unleashes the interest of the economic world. The attraction of knowing the figures for those most fond of numbers is combined with political interest in the implications regarding corporate power and business concentration. Also that of the clients to know what is going to happen with their mortgage and their savings account. That of the shareholders to know if they will receive higher dividends. From the managers because of how the highest-ranking positions are distributed and from the employees themselves, because these processes usually end with staff cuts.

In the case of BBVA and Sabadell it is a delicate operation. These types of mergers are very complex, and are usually discussed between the leadership of both banks for months before they are communicated. Financial sources recognize that events have accelerated. “The announcement to the market was precipitated by the leaks that were taking place and speculation about the price, but the people who had to know about the proposal knew about it,” say knowledgeable sources. But Sabadell has not yet decided if it wants to start negotiating.

BBVA has proposed combining both banks. In exchange, the shareholders of the Catalan entity would receive one BBVA share for every 4.83 shares they had in Sabadell. This means that they will gain 9% compared to the stock market closing this Friday, since BBVA shares are listed at a price of 9.85 euros and Sabadell's at 1.88 euros. BBVA also offers that three directors of the Catalan entity join the board of directors of the new bank, one of them as vice president (BBVA would have 15 members). Likewise, it proposes to maintain the headquarters in San Cugat (Barcelona) and the Sabadell brand in Catalonia.

If Sabadell agrees to negotiate the merger, the main issues will be the price granted to each bank and how the management positions are defined in the organizational chart. BBVA's offer is for Sabadell to have a weight of 16% of the group. In this fight for the money that each bank is worth, the entities are putting pressure to try to obtain a better valuation. The objective is for shareholders to obtain the greatest possible value.

BBVA's proposal involves granting Sabadell a value of around 11,500 million, compared to the current capitalization of 10,000 million. But that figure is lower than the book value (the “real” price that appears in the bank's accounts), which would be around 14,000 million. In fact, in general, analysts consider it to be a good offer but not particularly generous for Sabadell. “It is a quite attractive proposal, but not outstanding,” explain Deutsche Bank experts.

On the other hand, an important issue will be the negotiations on the distribution of senior positions in the organizational chart. Banks the size of BBVA and Sabadell are made up of hundreds of managers. From the board of directors, which is the body that makes the bank's decisions, to general directors, heads of business areas and middle managers. And in this game of negotiating the merger and defining the structure of the new bank, managers seek to maintain their rank or aspire to a higher one.

The letter sent by BBVA to Sabadell with the merger proposal is careful with the distribution of power. “The management team of the resulting entity would be made up of executives from both banks, based on principles of professional competence and merit, seeking to maintain proportionality based on the relative weight of the businesses,” the letter indicated. However, market sources consulted consider that it will be a point of friction.

BBVA's siren song to Sabadell comes from afar. The bank of Basque origin already attempted a merger with the Catalan entity four years ago, in the midst of the Covid-19 pandemic. That first approach failed because the banks did not agree on the value they granted to each entity. But the situation then is not the same as now.

Sabadell was worth 2,500 million on the stock market, its profit was barely two million and the profitability was 0%. In four years, the new management team, led by César González-Bueno as CEO, has managed to multiply the value on the Stock Market by four, has registered record profits with 1,332 million and the profitability exceeds double digits with 11.5% . In that sense, the financial sources consulted consider it a scarce reward for this management team to have 16 out of every 100 management positions. While weeding out the daisy, the Sabadell board will have to decide whether to change banks to join a multinational that fights with the banking giants, or maintain its current perimeter and focus on the business in Spain and the United Kingdom.

BBVA, for its part, is looking to take a leap forward and play in a bigger league. It is already one of the largest banks, but if it absorbs Sabadell it would rub shoulders with the largest financial institutions in Europe. Usually the size of a bank is measured by the millions of euros in assets it has. In Europe there are only nine banks that exceed one trillion euros (one million million) and if the merger is consummated, BBVA would be the tenth.

It would also increase its exposure in Europe (especially Spain and the United Kingdom), which would allow it to not depend so much on emerging markets such as Mexico, Latin America and Turkey. In the latter, and due to the macroeconomic situation of the country, the contribution to the results has been meager.

The continued concentration of the financial sector is causing a few banks to share the bulk of the business. In the last 20 years the banking map has changed completely. Of the 55 entities that existed in Spain in 2009, only 10 large banking groups remain, which will become nine if the merger between BBVA and Sabadell is consolidated.

According to Morningstar analysts, the union between BBVA and Sabadell would concentrate 20% of the credit and deposit business in Spain. And the first three entities account for 70% of the business. In addition, the BBVA-Sabadell union would be the only entity with a bank office in 48 postal codes.

Although the levels of concentration are high, banking competition in Spain is broad, since in general all entities allow you to create an online account or contract their products and services through the app mobile phones or web pages. In recent years, digital banks, foreign entities and fintech They have added to the offer that traditional banking already offered, so if a customer is not satisfied with the conditions offered by their bank, they can change entities in a few minutes using their mobile phone.

The problem is more focused in rural areas where there is only one office. Usually, these areas, which are largely populated by people who belong to the elderly group and who are less familiar with new technologies, prefer to have all their banking operations in the entity that has an in-person office nearby, in order to receive in-person attention. in case you have to resolve any incident. This creates the risk that if there is only one office in the municipality, that bank may charge higher fees than the market average. Also higher interest rates on loans and mortgages, since customers will continue to contract the products, as it is the only bank that offers in-person service.

But it is a complex balance. Although there are fewer and fewer banks, which are increasingly larger, supervisors have been encouraging mergers between entities. The obsession of the European Central Bank (ECB) is to have solid and solvent banks that can withstand a crisis. The financial collapse that began in 2008 with the fall of Lehmann Brothers is far away, but its effects are still very present among supervisors and they do not want it to be repeated.

When an economic crisis breaks out, banks are one of the instruments to maintain stability, since if they have sufficient liquidity they allow money to be pumped into companies and families. They also make it possible to agree on joint measures with governments to alleviate the effects of an unexpected situation. In this sense, banking supervisors highlight the role of banks during the Covid-19 pandemic. At a time when some businesses closed due to quarantines and families stayed at home, banks and governments enabled credit lines and advantageous conditions to compensate for the temporary loss of income and allow for a faster recovery as soon as the economic activity returned to activity.

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