M&A Deals

La fusión: Bankia and CaixaBank proposed merger

Spanish lenders Bankia and CaixaBank have recently been involved in merger talks, with a proposed €17bn all-share merger set to be the largest in the financial sector for years. This proposed merger would result in a new entity with a combined market capitalisation of €16.6bn. Investors reacted optimistically to the news, with share prices of both Bankia and CaixaBank rising sharply in the early hours of trading on Friday September 4th — Bankia’s share price rose 29% to €1.34 while CaixaBank’s share price increased 15% to €2.08.

Deal overview

An all-share merger is when original shareholders are given the same value of shares in the new company that they owned in one of the old companies, with most mergers usually occurring on this all-share basis. The proposed all-share merger between Bankia and CaixaBank would create Spain’s largest bank, with assets of more than €650bn. These assets are approximately divided in a 2:1 ratio between CaixaBank, the larger of the two lenders, and Bankia. The new entity would become the country’s largest lender by market share in domestic loans and deposits, but they still face strong competition from Santander and BBVA who have more extensive overseas operations.

At present, Bankia are a part-nationalised bank as the Spanish government own a stake of just under 62% in the group. This is due to the €22.4bn rescue package the government provided during the Eurozone crisis in 2012. Currently, both lenders are negotiating the distribution of shares in the new, merged entity. It is estimated that the state will end up owning around 14-17%, with the Caixa Foundation, CaixaBank’s largest shareholder, set to receive 27-30%.

Deal rationale

Low profitability in the banking sector

The COVID-19 pandemic has intensified the pressure that retail banks currently face. With global lockdown restrictions and few signs of an immediate economic recovery, lenders have been forced to set aside costly provisions as a result of a sharp forecasted increase in loan defaults. This is a consequence of significant, global economic decline and the negative impact this will have on business liquidity and the ability to repay loans. CaixaBank’s net profit reduced by 67% in the first half of 2020, with the bank having to set aside €1.1bn as provision for bad loans linked to the pandemic. Bankia’s net profit for the same period also fell by more than 60%. The scale at which banks are having to make provisions for bad debt is the highest since the second half of 2009. According to Citigroup data, 15 of the largest US banks have set aside $76bn to cover projected bad debts whilst the 32 largest European banks have set aside €56bn. In the aftermath of 2008, new regulations have been introduced to ensure that lenders build reserves well in advance of any defaults and as such, the earnings of retail banks this year have not made for a pretty sight. 

With the financial sector already suffering from historically low interest rates, and even dropping to negative rates in Europe, the COVID-induced pressure on banks’ profitability has only increased this year. The low interest rates, with no sign of short-term alleviation from central banks, has reduced income from interest-bearing assets and means that banks cannot take advantage of the net interest margin between the interest paid to customers and the interest earned by investing.

The low profitability in the banking sector is particularly damning for retail banks who cannot take advantage of the market trading boom and historically volatile markets like their investment bank counterparts. Issuance of debt and equity, along with wealth management expertise, has softened the blow for large investment banks due to the greater demand for such capabilities during the COVID-19 market environment.

Cost savings

Consequently, low profitability in the banking sector necessitates the drive towards cost efficiency for retail banks such as Bankia and CaixaBank. Spanish banks have also been facing increasing regulatory costs and subdued credit demand in the previous decade which makes cost-cutting vital to maintaining slim profit margins. Bloomberg Intelligence estimates that the proposed merger between Bankia and CaixaBank could deliver upwards of €450m a year in cost savings from closing down duplicated branches and cutting staff.

Government approval

Pedro Sanchez, the current Spanish Prime Minister, has welcomed plans for the proposed merger on the premise that it is good for the Spanish economy. Spanish and Eurozone regulators have been consistently pushing for further consolidation of banks and will continue to press this issue. Stefan Nedialkov, analyst at Citigroup, does not expect government intervention to pose a potential barrier to the deal as it “provides the government with a more liquid way of exiting its Bankia stake”. The ECB have also recently signalled a willingness to ease restrictive conditions for mergers in the banking sector, by not requiring as high a capital ratio for the merged entity. Therefore, the pressing need for stability in the Spanish, and ultimately Europe’s, financial system is clearly the priority of the state in this situation.

Wider impact

As well as boosting the share price of both Bankia and CaixaBank, the merger talks also increased the share price of domestic rivals Banco de Sabadell and Bankinter by more than 11% and 6% respectively. Elsewhere in Europe, France’s Société Générale and BNP Paribas both experienced a rise in share price of around 5% and Germany’s Commerzbank saw its share price increase by 8%. This ripple effect across European banks is symptomatic of investor speculation of further waves of deal-making and consolidation within the sector. This is particularly true in Europe, where banks have suffered more than their US counterparts during the COVID-19 pandemic. With European bank stocks down 39% since the turn of the year, expect further M&A activity in the sector moving forward as banks look to gain economies of scale and strengthen their business models in a bleak economic environment. The Bankia and CaixaBank merger could well be the ‘canary in the coal mine’ that shows the cost synergies that can be achieved via mergers in the European banking system.



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