LONDON (Reuters Breakingviews) – Spanish banks are taking the lead where many European Union competitors fear entering. Caixabank and state-backed Bankia announced Thursday evening that they were in talks on a deal that would create the country’s largest domestic lender with € 664 billion in assets. Union in the market offers the best way to protect income from the effects of negative interest rates and bad debts induced by the pandemic.
Although details are scarce, the Spanish government expects its 62% stake in Bankia – the consequence of a state bailout in 2012 – to shrink to around 14% of the combined entity. sources familiar with the matter told Reuters. This implies that the much larger Caixabank is offering little or no premium for what would effectively be a takeover.
The move seems opportunistic given Spain’s murderous recession. Even after rising by a quarter on Friday morning, Bankia shares are valued at just 0.3 times the tangible book value of the bank, well below that of Caixabank at 0.6 times.
Yet the agreement has eminently meaning. The Caixa-Bankia handset would hold 30% of the Spanish market according to Jefferies analysts, overtaking Banco Santander. Closing overlapping branches and eliminating other duplicate costs would boost profitability. Suppose Caixabank could reduce Bankia’s operating expenses by 40% in 2019. Taxed and capitalized, these synergies would have a present value of around € 4 billion, according to a calculation by Breakingviews that assumes € 1.8 billion. euros of integration costs. This is roughly equivalent to Bankia’s current market value.
As of Friday morning, Bankia was worth 8.5 billion euros less than its tangible book value at the end of June. A deal struck at this price would create capital gains that could help cover integration costs and – if regulators allow – increase Caixabank’s Tier 1 capital ratio by 12.3%.
Given the involvement of the Spanish government, Caixabank chief executive Gonzalo Gortazar will face a delicate task of imposing branch closures and job losses. But the continued fallout from the pandemic makes the push for consolidation hard to resist. Spain has tended to show the way for European countries by encouraging domestic bank mergers. Other EU countries should take note.
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