Sabadell warned against move for Unicaja as Spanish bank merger buzz persists

A deal to acquire Unicaja would strengthen Sabadell's position as Spain's fourth-largest lender by total assets. Source: Horacio Villalobos, Corbis/Corbis via Getty Images.

Banco de Sabadell SA would be unwise to make a move to acquire domestic rival Unicaja Banco SA as it could threaten its recovery from a prolonged period of underperformance, analysts warn.

Speculation about a potential deal persists in Spain even as Sabadell's president Josep Oliu recently denied any plans or negotiations to merge the banks. A takeover of Unicaja would strengthen Sabadell's position as Spain's fourth largest bank by total assets, which would increase by almost €100 billion to €332 billion, according to S&P Global Market Intelligence data for 2023 year-end.

Sabadell is in the process of restoring the faith of shareholders after several years of turbulence, including the botched implementation of an IT program at its UK bank TSB Banking Group PLC in 2018 that lost the bank more than €300 million. The bank appointed a new CEO, César González Bueno, in 2021, and its share price has risen steadily since.

"Sabadell was not in a very good situation three years ago," María Jesús Parra, vice president and Spanish bank analyst at credit rating agency Morningstar DBRS, said in an interview. "Going into M&A with Unicaja will be kind of disruptive. It will take their attention away from the strategy they have right now, and it could create some unnecessary mess."

Rates benefits

Like other Spanish lenders, Sabadell has benefited significantly from the rapid rise in interest rates in the last two years. The bank's recurring revenues grew more than 12% year on year in 2023 to €5.8 billion, Market Intelligence data shows.

The income boost has helped the bank's return on average equity (ROAE), a key measure of profitability, to rise from 4.23% in 2021 to 9.88% in 2023, the data shows. The bank's common equity Tier 1 capital ratio, a key measure of solvency and the likeliest source of funding if a deal were to happen, has also benefited from the more benign operating environment, rising to 13.19% in 2023 from 12.22% in 2021.

The improved performance has rewarded shareholders and attracted support from the market, driving Sabadell's total shareholder return up 124% since the beginning of 2022, Market Intelligence data shows.

Sabadell still has some work to do to avoid "losing the attention of investors," a bank equity analyst who asked not to be named told Market Intelligence. The bank, whose last strategy announcement was in 2021 and ran to the end of 2023, has yet to announce a new strategy or Investor Day.

"They need to tell investors what the plans are for the coming years in order to keep them inside the equity story," the analyst said.

Sabadell did not reply to a request for comment.

The bank foresees no changes to its "perimeter" and "no clear M&A activity in Spain," which is "more consolidated than other markets in Europe," González Bueno said during the bank's 2023 full-year earnings call in February.

Problems at Unicaja

Recent problems at Unicaja, which have weighed on the banks' share price, have raised the prospect that the bank could become a target for acquisition. The lender was embroiled in a corporate governance row that led to the resignations of Unicaja Foundation president Braulio Medel in 2022 and of chairman Manuel Azuaga in November.

It has lagged its domestic rivals' robust performances since interest rates began to rise in 2022.

The bank's recurring revenues fell 1.3% to €1.53 billion in 2023, contributing to dragging its ROAE down 27 basis points (bps) to 4.12% for the year, Market Intelligence data shows. Unicaja's cost-to-income ratio weakened 213 bps to 63.6% last year.

The problems at the bank, along with its weak performance, have led its share price to underperform both domestic peers and the wider European banking sector. Unicaja's total shareholder return increased just 17% between Jan. 1, 2022, and March 1, 2024, compared to 30.7% for the S&P Europe BMI Banks Index during the same period, Market Intelligence data shows.

Unicaja's recent appointment of a new CEO, Isidro Rubiales, is likely to discourage its shareholders from entertaining a bid for the bank anytime soon, said the anonymous analyst.

"Unicaja has a new CEO who will want to try new policies and implement new practices," the analyst said. "You need to let Unicaja's management work on their plan and, if in a year or two years things have not improved and the share is not improving, then they might start discussing other plans."

Unicaja told S&P Global Market Intelligence in an emailed statement that "no contact has been maintained [with Sabadell], nor is there any corporate operation on the table. [Unicaja's] aim is to improve both its structural profitability and the quality of customer services – issues that focus our actions."

Moves could be appealing

Still, forecasts of an imminent loosening of monetary policy by the European Central Bank could begin to make moves for domestic rivals more appealing to bank executives, said Benjie Creelan-Sandford, European banks equity analyst at Algebris Investments.

"We're now at a point where rates are peaking and are set to come down, and banks are going to have to start working a little bit if they want to continue generating ongoing momentum," Creelan-Sanford said. "So there is an argument that one of the ways to do that is M&A because of the cost synergies etc. that you can strip out."

Any move by Sabadell for Unicaja would further concentrate a Spanish banking sector that has undergone significant consolidation in the last 15 years. A flurry of deals in the aftermath of the 2008 global financial crisis and in the years since has combined 65 lenders into the 10 largest banks in the country today, S&P Ratings data shows.

The relative health of the Spanish banking sector compared to the turbulent years following 2008 makes a deal between the banks less attractive and more unlikely, Parra said.

"We are in an environment with so much liquidity, such high capitalization levels, interest rates back to normal, which should drive growth in the future," she said. "So if the banks in the market have been able to survive tough periods in the past, I don't see any reason for them right now to consolidate."