Following numerous insinuations and a great deal of political pressure in recent years, both from within our borders and from beyond the Pyrenees, two Spanish institutions have agreed to begin analyzing creating a union that may give way to future mergers so desired by the political class. Two large firms that are emblematic of the Spanish financial system, Caixabank and Bankia, took a step forward this Thursday by declaring their commitment to unite as if it were a marriage of two great families.
On the one hand, Caixabank, the leading bank in assets of the Spanish financial system, with 369 billion in 2019 and one of the largest corporate portfolios in Spain. Admittedly, other competitors such as Banco Santander fall behind in this ranking simply due to the fact that only business in Spain is counted. Following the purchase of Popular in 2017, Santander surpassed 400 billion in assets in its Spanish subsidiary, which it quickly reduced by moving its corporate and investment banking to Santander UK, and its digital banking (Openbank) to its Santander Global Platform conglomerate.
Then there is Bankia-BFA. It is impossible to mention Bankia without referring back to the bank bailout in 2012. Let’s remember 2012 briefly. The Spanish financial system was faltering and Mariano Rajoy’s government was forced to request a line of credit of 100 billion, of which it used 41 billion to clean up the financial sector. Bankia was “injected” with 22.4 billion through the purchase of capital instruments by the FROB (Fund for Orderly Bank Restructuring). This meant that the government, i.e., all of us, then took a stake in Bankia as shareholders. We still hold this stake today and many are wondering what will happen to it if the merger goes ahead.
The merger will yield a transatlantic financial firm with more than 650 billion in assets. The government, we, will hold a 61.8% stake in Bankia and will have around a 14% stake in this new company, which is naturally much larger. This, in principle, should not adversely affect the value of that stake we hold as shareholders. On the contrary, sector sources estimate synergies valued at around 1 billion euros per year due to efficiency improvements that would represent 40% of Bankia’s cost base. Efficiency improvements mean lower costs for the same or a higher turnover, in other words, staff and office reductions are already on the horizon for this merger (it could not be otherwise). The same sources estimate at three billion the outlays that this new banking institution would have to pay out in order to cope with these improvements, the main focus of costs being early retirements.
Banking is a traditional sector in this respect and no non-negotiated layoffs or labor disputes are expected. As in other mergers, employees who are close to retirement age will come out winning, and the rest will come out losing, with job transfers and increased workloads.
As shareholders, should we then assess this merger as positive? First of all, to answer this question we must take into account that both families want this marriage to take place. Caixabank wants to grow and consolidate itself as the largest asset holder in Spain. Bankia, its shareholders, want value and it is becoming increasingly clear that it will be very difficult, if not impossible, to recover the injection that was made in 2012. Bear in mind that the government’s stake in Bankia was valued last Thursday at around 2 billion euros, far from the 22.4 billion, or 19.1 billion if we take into account the 3.3 billion recovered so far.
Furthermore, interest rates have been very low for more than five years, even negative at times, making it very difficult for the banking business to turn the kind of profit that could lead to the recovery of the money invested. Years of unfavorable conditions for banks are still expected, so a more efficient management of resources will undoubtedly help us weather the storm better and make us think, as shareholders, that perhaps one day we will recover part of what we put in.
Of course, not everything in this merger is positive. Competition will suffer and if this merger is followed by others, the Spanish financial system could end up with three titans running the entire national financial services industry as they see fit. There will be tremendous political pressure and the National Commission on Markets and Competition is more than likely to timidly raise its voice, although it is unlikely to actually take the step of blocking the merger. The victim of reduced competition is the end consumer, and given that practically all of us are consumers of banking services, this could lead to an increase in the cost of services for the general population. This would result in a shift of resources to a sector that could take advantage of this lack of competition on the market.
In short, it will be the first marriage after the bailout of Banco Popular in 2017, and all indications point to the fact that it will not be the only one. Banks need strength to hold out, and the political class never tires of pushing for these unions. This union will probably enable us to recover a small portion of the money injected into Bankia at some point in the future, but it will undoubtedly dangerously pave the way for a sector with few competitors that could end up diverting resources from productive sectors (workers and companies) to others that are less so, thus reducing competitiveness and national wealth.
Jon Frías is professor de Economics at the Grado en Dirección y Creación de Empresas
