The number of banks with a significant size in Spain has decreased from 45 to 10 since the outbreak of the Great Financial Crisis in 2008. Most of it was due to the merger of entities with issues -in many cases nationalized- that were absorbed for more solid ones: it happened between 2009 (intervention by Caja Castilla-La Mancha and award to Cajastur) and 2017 (the same with Popular and Santander). In 2020, there was another small round of mergers (absorption of Bankia by CaixaBank and Liberbank by Unicaja). But then they were entities more solid who faced, due to the pandemic, a gloomy scenario of low income and late payment upward trend that ultimately did not materialize. The hostile takeover launched by BBVA on Sabadellhowever, responds to other factors: the imminent rate drop of interest and the growing increase in technological costs of banking.

The financial sector is experiencing a sweet momentwith the profits at historic highs thanks to the tightening of monetary policy to combat inflation. After years of crossing the desert in the results of the era of the ultra low rates (2014-2021), the strong rise in these has income skyrocketed of banking by making credit more expensive. To maximize the positive effect, in addition, entities have taken care to raise deposit remuneration less than in Europe and what would have been expected based on past episodes of rate increases. The result is that the banks are going through a situation of strength: BBVA closed March with a cost effectiveness of 17.7% and a capital of 12.82% and Sabadell, with 12.2% and 13.3%.

Without being worrying, the future is not so encouraging. On the one hand there is a temporary cause: the European Central Bank (ECB) plans to start the rate reduction cycle in June. At the same time, there is another more structural one: the fixed costs of banks have not stopped growing for years, mainly due to the need to invest in technology to adapt to the digital revolution. This was recognized by BBVA in the letter it sent to Sabadell to propose the merger: their union would allow “to efficiently address investments in digital transformation“, as well as increasing profits “despite a macroeconomic context with prospects of rate cuts of interest and a foreseeable lower growth from the investment credit in Europe”.

Reasons for a takeover

He Bank of SpainIn fact, it has been warning banks for some time that part of the recent increase in its profitability is not sustainable. The governor, Pablo Hernandez de Cosinsisted on it last week in Congress: “We must not get carried away by the complacency. The improvement of interest margin associated with the rate hike has probably already reached its highest point and this item could stabilize or reduce in the future. Furthermore, the bulk of the adverse effects of increasing rates on homes and the companies is produced with a certain time delayand therefore it is foreseeable that there will be an increase in losses due to asset impairment (late payment)”.

For his part, the CEO of BBVA, Onur Gençused on Thursday the need to gain size to face the digitization as one of the main reasons to justify the hostile takeover: “The scale is becoming increasingly important in retail and commercial banking for one very simple fact: fixed costs, within our overall cost base, continue to increase every day. The technology costs They were 19% of our total costs five years ago and now they are 26%. Most of it is software development. Whether we have 100 or 1,000 clients, we carry out the same developments for our mobile appwith the same cost”.

Of course, there are intrinsic factors additional. “The lowering of rates is a factor in favor, but I believe that the fundamental reason for the takeover bid is that BBVA wants to increase its balance in euros growing in Spain, diversify in a country where it does not have a presence with TSB (british subsidiary del Sabadell), and reach a larger size to increase its weight as global actor and have more resources to invest in technology. Companies like Google and Amazon are getting bigger for that reason. AND is going to happen in bankingbecause the sector also uses information and communication technologies”, points out Santiago Carboprofessor of economics at the University of Valencia and director of financial studies at Funcas.

Uncertain round

Does banking then face an imminent round of mergers? Some movement is not ruled out, but the margin is narrow. Many entities have large controlling shareholders They have no intention of selling nor pressure to do so given the good timing of results. This is the case of banks controlled by foundations of the old boxes (Kutxabank and Ibercaja) or property of private investors with large holdings (Bankinter and Abanca). For its part, the head bank of Cajamar is controlled by cooperatives of credit, which complicates any operation. The doubt is Unicajaan entity with a cash foundation as the main shareholder but listed on the stock exchange, which has gone through governance problems after the absorption of Liberbank, and which in the recent past has been the object of desire of rivals such as Sabadell.

“In Spain there is already little margin of maneuver for more fusions. In just a few years, the concentration of the market, although it has not yet reached the level from which it is considered highly concentrated. BBVA's move is justified by its peculiaritieslike having made cash not long ago with the sale of a bank in the USU and for him excess capital that it has that allows it to consider purchases”, he estimates Joaquin Maudosprofessor at the University of Valencia and deputy director of research at the Ivie.

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