CaixaBank SA's proposed acquisition of Bankia SA will create Spain's largest domestically focused lender, allowing the former to slash costs by closing branches and boost its customer base at a time when Spanish banks are dealing with tough competition, digitalization, low interest rates and an economic downturn.
The economic impact of the coronavirus has intensified the challenges faced by the sector, making consolidation a natural step to remain competitive, according to analysts.
The two lenders announced on Sept. 18 an all-share merger valuing Bankia at €3.8 billion, according to Bloomberg News, in the biggest deal on the Spanish market since the country's banking industry went through a wave of restructuring following the financial crisis. It is expected to close in the first quarter of 2021.
"We want to build up a bank with scale, strong financials and create profitability. We need scale to improve efficiency and to reinforce the capacity to invest in technology and innovation," Bankia Executive Chairman José Ignacio Goirigolzarri told an analyst conference call. Goirigolzarri will take chairmanship of the new entity and CaixaBank's Gonzalo Gortázar will retain his position as CEO.
Largest domestic player
CaixaBank is Spain's third-largest bank by assets. The enlarged group would remain in third spot with €664.03 billion in assets, based on S&P Global Market Intelligence data. The combined net loans of the two banks total €358.74 billion. It would be the largest domestic player, with 25% market share in loans and 24% in deposits. According to DBRS Morningstar, the country's leading banks, Banco Santander, SA and Banco Bilbao Vizcaya Argentaria, SA, hold 15.9% and 14.4% gross loan market share, respectively.
"It's a natural focus when revenue growth is a bit tough to come by," said Tom Kinmonth, fixed-income strategist at ABN AMRO. "There's been a lot of cost cutting and structural changes over the last few years by these banks and now it's the next step in trying to make a change."
"The main positive is the scale you gain and therefore the ability to extract further cost savings and synergies," said Jefferies analyst Benjie Creelan-Sandford.
"When you look at the extent of the branch overlap between CaixaBank and Bankia, the combined entities have the ability to close a lot of branches without necessarily losing any visibility on a given town or high street," he added. More than 80% of Bankia's branches are less than 1 kilometer from a Caixabank branch, he noted.
According to S&P Global Market Intelligence, CaixaBank has 3,988 branches throughout Spain, while Bankia has 2,154 located mainly in Madrid, northern eastern and southern Spain.
Bankia's integration into CaixaBank will generate €770 million in annual savings by 2023, equivalent to 42% of Bankia's 2019 cost base.
"The main advantage coming from the deal is the cost savings coming through and that's how you generate the value," Creelan-Sandford said.
Restructuring charges will be around €2.2 billion, mostly taken against 2021 earnings. The bank's return on tangible equity — a key measure of profitability — will be 8.2% by 2022, up from a projected 7% and 3.2% for a stand-alone CaixaBank and Bankia, respectively. CaixaBank's ROTE alone stood at 5.6% at the end of June, down from 5.9% in the same period of 2019.
Creelan-Sandford predicted CaixaBank could use its strong position in asset management and insurance to cross-sell products across Bankia's network.
CEO Gortázar said the bank was expecting additional revenue of €215 million by 2025 by selling its bancassurance products to a larger customer base.
Assets under management and saving insurance funds as a percentage of total customer funds total 41% at CaixaBank and 22% at Bankia, the banks said in a presentation. The percentage of CaixaBank clients with life insurance products is 22%, while the figure at Bankia is 10%.
At the end of June, CaixaBank had a 28.4% market share in life insurance and 17.5% in mutual funds. Bankia had a 7.38% mutual fund market share, according to its second-quarter earnings presentation. Insurance figures were not available.
Bankia is more skewed toward mortgages, where asset quality is more robust than in consumer finance and small and-medium-sized enterprises in the current environment, Creelan-Sandford said.
The combined bank will have a mortgage market share of 28%, with CaixaBank accounting for 16% and Bankia 12%.
Mortgages account for 53% of Bankia's loan book, and corporate and SME lending 34.5%, the bank said when presenting second-quarter earnings. The rest is dedicated to consumer finance, public sector and developer lending. Mortgages amounted to €63.5 billion as of the end of June, out of a performing loan book of €110.4 billion. At CaixaBank, residential mortgages stood at €86.8 billion at the end of June, according to its second-quarter earnings presentation, out of total loans of €243 billion.
Bad debts
Like most Spanish lenders, both banks have been untangling large amounts of toxic debt inherited from the country's real estate boom and bust, but the coronavirus has revived concerns about bad loans.
CaixaBank's nonperforming loans as a percentage of loans held at amortized cost stood at 3.90% at the end of the second quarter, down from 4.57% the year before. At Bankia, the ratio was 4.83% down from 5.70%, according to S&P Global Market Intelligence data.
The new CaixaBank will have a nonperforming loan ratio of 4.1% and a coverage ratio of 64%.
Spanish banks have the lowest capital levels among large European lenders, but Bankia fares better than its peers. Its common equity Tier 1 ratio was 13.27% June-end, up from 12.91% the year before, S&P Global Market Intelligence data shows.
The combined bank is aiming for a CET 1 ratio of 11.6% by the first quarter of 2021, which is down from a pro forma of 12.8% June-end 2020 amid restructuring costs, but it will remain 310 basis points above requirements.
According to S&P Global Market Intelligence, CaixaBank's CET1 ratio stood at 12.26% at the end of June, up from 11.55% the year before.
"Because of the good capital levels in our case and the clear excess capital in the case of Bankia, we can afford to do this without raising any capital," Gortázar told analysts.