Rate Climb Speeds Up Bank Consolidations, Yet Guideline Stops Them

Rate Climb Speeds Up Bank Consolidations, Yet Guideline Stops Them

Next June 9 will be a decade since Spain asked Europe for a line of liquidity worth up to 100,000 million to rescue insolvent banks and, by extension, the economy. Doubts about the health of entities infected the sovereign and forced the Treasury to offer returns of more than 7% to place titles. Italy, Portugal and Greece suffered equally on their debt from speculative attacks that bet on breaking the euro under the idea that their finances would not withstand the rescue of their banks.

Only the magical words that Mario Draghi uttered on July 26, 2012, the famous ‘Whatever it takes’ or “The ECB is ready to do whatever it takes”, managed to save Europe. But immediately afterwards, it became a matter of utmost urgency to guarantee the solvency of the banking system in order to avoid costly crises for the Treasury, Europe strove to speed up the Banking Union and the supervisor ‘s speech included the determination to encourage transnational mergers that, once decade later, they still don’t gel.

“It was already said then: this will work well if there are transnational mergers. It would be the cotton testto try to make the markets no longer local… But it never happened”, recalls Alberto Calles, partner in charge of the Financial Regulation and Risk Unit of PwC Spain.

Among the experts, as in the banking itself, there is the conviction that the rise in rates will allow them to dream of international operations, although they rule them out until Europe is more common in regulatory terms. In principle, there is room for them to take place.

“If we look at the European market, there is still a higher fragmentation than we see in other markets. If we consider the levels of profitability and efficiency, from a financial point of view it makes sense to think about mergers, even between different countries, but we follow it looking complicated,” says Luigi Motti, head of analysis for EMEA Financial Institutions at S&P Global Ratings.

Some players would be well placed to play a leading role: “The large Spanish banks, given their position of strength, are clear candidates to lead projectsof trans-European banking integration if these finally take place”, adds Francisco Uría, partner in charge of global banking at KPMG.

“BBVA and Santander are already two banks with a high level of international diversification, but also others such as CaixaBank, Sabadell, Bankinter and Abanca have a presence outside of Spain, even with differences between them and the rest, they continue to be fundamentally regional entities.

These last entities are going to focus more on increasing their diversification within Spain because they do not have the size or the resources, not only capital, but also human and structural resources to do something else,” adds Elena Iparraguirre, financial institutions analyst at S&P convinced that it will happen, although “perhaps the times are not ripe”.

Allen&Overy’s M&A partner, Bosco de Checa, also sees ” significant” advantages to a potential pan- European integration: “The strengthening of European financial entities with a global profile that can compete with the main North American and Asian financial operators; the potential synergies and economies of scale that certain mergers would represent; or diversification at the product or geographic level “, although he clarifies that there are “challenges” that make them difficult.

Opportunity and advantages
The opportunity could come, in Uría’s opinion, from the rise in interest rates since, “to the extent that it can contribute to improving bank profitability in the medium term, it could end up becoming an incentive for future bank consolidation ” . “I, as a bank manager, as long as I have to reduce costs, I prefer to try to merge with an entity from my own country.

If rates start to rise and they start to have more margin, then I can think about diversifying the business as was thought in the past, but I’m talking of a future and in the field of transnational mergers”, agrees the PwC expert.

The foundations are, in fact, laid because banking has become stronger and more efficient. The financial crisis of 2008 caused the greatest concentration of the sector on a domestic scale in recent decades due to the reconversion of savings banks and the need to add oxygen to the starving profitability.

The business was also shrinking: from the ‘real estate boom’ where credit multiplied from 800,000 million to 1.87 trillion between 2004 and 2007, a deleveraging followed that has lasted until today, with 1.2 trillion in the portfolio, and the real estate crash it devoured provisions at a speed impossible to generate in the ordinary account.

From about 60-70 entities it went to a dozenwith a certain weight and dimension between 2009 and 2011. But since the 2012 bailout, hardly any national transactions have been carried out, although larger ones (CaixaBank and Bankia; together with Unicaja and Liberbank; in addition to several acquisitions by Abanca) and none especially key on a pan-European scale.

well positioned
However, the entities have done their homework by reducing their structure by almost half and the general profitability already covers the cost of capital , without the official price of money having yet come out of negative territory (the ECB still charges 0 .50% to the bank for leaving their liquidity at the teller window).

They are capable of doing more business with less structure and the large banks expect an extra 3,100 million in interest margin if rates rise one percentage point and the market takes for granted that the Euribor will rise to 1.5% (it would be two points from -0.5% at the end of 2021).

However, banks and experts rule out transnational mergers in the near future. “At the moment -adds Uría-, and given the situation of uncertainty regarding the evolution of the economic situation, the future decisions of the ECB in terms of monetary policy and the possible risk of a situation of financial fragmentation in the Eurozone , it does not seem It is likely that cross-border integration operations will be reactivated in the short term”.

Regulatory fragmentation weighs heavily (different rules in each country that complicate management and global commercial actions on matters as disparate as taxation, consumer protection, resolution of business insolvencies, control of money laundering, etc.) and, above all, the unfinished Banking Union. “I have always thought that with such low rates, transnational operations are technically unlikely. Then there is the political issue of the creation of a Common Guarantee Fund in Europe that has not been carried out and, for the moment, does not seem likely. to be achieved,” recalls the PwC partner.

The financial crisis and the scare of the attacks against the euro led to the European Council, the European Commission, the ECB and the Eurogroup creating a roadmap for the Banking Union in December 2012. In November 2014, the Single Supervisory Mechanism (MUS) or supervisory arm of the ECB was launched, in 2016 the Single Resolution Board (SRB) started and the deposit guarantee fund began to be negotiated.

His project is still open and, after several delays, it is now expected to be fully mutualized in 2028 . Its conclusion and the political commitment necessary to complete it is the great demand of banks in the face of the repeated call for mergers of regulators and supervisors.

“The States of the European Union have shown a certain nationalism by resisting losing local entities that could be absorbed by larger ones, from other countries, but I believe that it is something inevitable given the reduction in the number of banks and the pressure on margins seems something necessary”, adds Ignacio Ruiz-Cámara, partner in charge of Banking and Finance at Allen&Overy. There are also no immediate efficiencies.

“There are various obstacles, such as regulatory fragmentation, but the biggest obstacle lies in the difficulties of capturing synergies in cross-border operations that do occur in domestic operations (basically due to the integration of branch networks) and the high execution risks” , indicates the KPMG partner.

‘Shortcuts’ to the guarantee fund
These are obstacles that the banks themselves have repeatedly denounced and whose solution they urge to pave the way along with measures such as applying “exemptions to manage capital and liquidity at a consolidated level.”

Their appetite was tested by the European Banking Authority (EBA) itself in a recent survey in which 60% of European banks stated that they are considering the possibility of embarking on transactions. To encourage transactions, the ECB released a guide explaining how it would act in the face of a transaction from a supervisory perspective and have even raised shortcuts to regulatory obstacles.

The president of the supervisory arm of the ECB (MUS), Andrea Enría , has recognized that the creation of the deposit guarantee fund is a political issue that escapes banks and supervisors, but that action must be taken because it would limit risks and give advantages to entities, customers and economy.

Among his prescriptions , he has suggested formalizing intra-group contracts approved by the ECB that guarantee the support of subsidiaries in difficulty or copying the system used by non-euro banks to locate themselves in Europe after Brexit through branches versus subsidiaries.

Experts believe that it will be a matter of time and taking steps: “As with everything in Europe, time is needed, but as the banking union is completed, including the creation of a common deposit guarantee fund, and the different authorities and the management teams of the banks have more clarity about the feasibility and the benefits of transnational mergers, operations of this type can take place”, estimates Luigi Motti, from S&P.

Leave a Reply

Your email address will not be published. Required fields are marked *