No place like home

Spanish banks will be pushed into more deals

A Spanish bank's work is never done. Having survived a massive real estate bust, an ensuing euro 41-billion bailout and the demise of the savings banks, they now face another big problem: lacklustre profitability. Weak credit growth, zero interest rates and too many bank branches should spur another round of deals.

Banks have been gobbling up weak players, like BBVA's purchase of Catalunya Banc. The number of lenders has fallen sharply. Yet the country remains overbanked. There was one branch per 1,362 people in 2013, against a euro zone average of just over 2,000. Meanwhile, credit should stop shrinking this year but loan growth is weak. Banks are competing fiercely for few solvent borrowers, hurting net interest margins. Return on tangible equity for domestic Spanish banks next year will be just 8.8 per cent, according to estimates by Exane BNP Paribas.

So banks must cut costs. Oddly, Sabadell has gone shopping in the UK, perhaps to gain scale ahead of potential consolidation in Spain. But synergies closer to home look juicy: BBVA estimated it could cut up to 40 per cent of Catalunya Banc's cost base. Spain's three largest players - Santander, BBVA and Caixabank - have 35 to 40 per cent market share, lower than the top three enjoy in other European countries such as the UK. The next tier of Sabadell, Popular and Bankia are a good bit smaller. Then there are tiddlers like Liberbank, BMN, Kutxabank, Ibercaja, Unicaja and Abanca.

Isidro Faine, chairman of Caixabank, believes the number of banks will shrink to six or seven. That seems right. The question, though, is timing. Caixabank is big but has some gaps in its national footprint. Market share is low in next-door Aragon, the stronghold of Ibercaja, for example. Many of the smaller banks like Kutxabank that are doing well are still owned by savings bank foundations that may want to hold on.

Bigger combinations can't be ruled out. The state must sell its stake in Bankia by 2017. Bank chiefs may wait until after the political dust settles following general elections this year. Santander has enough on its plate getting its US operations sorted. And BBVA, Sabadell and Caixabank may be busy integrating deals. But chances are this time next year there will be fewer players.