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M&A talk heats up among Spanish banks, but deals no easy task

A possible takeover of Liberbank SA by Abanca Corporación Bancaria SA is a sign that M&A is heating up in Spain's banking sector, but the breakdown of recent merger talks between Liberbank and Unicaja Banco SA reveals the difficulties involved.

The Liberbank-Unicaja talks broke down in May after the two banks were unable to agree on a share swap. At one point Abanca stepped briefly into the fray, discussing a possible bid with Liberbank shareholders, but withdrew its interest.

Now, a report suggests it could be back in the bidding. An Abanca acquisition of Liberbank would create the sixth-largest bank in Spain by asset size.

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Spain's banking industry underwent a vast restructuring following the country's real estate crash in 2008 and the ensuing financial crisis, with the number of saving banks falling to 11 from 45 between 2010 and 2015. The market has become more concentrated, with 66% of deposit market share in the hands of the five largest banks, compared to 45% 10 years ago, Pablo Manzano, an analyst at DBRS rating agency, said in an interview.

The recent interest around Liberbank has sparked speculation that a second wave of consolidation may be kicking off.

The industry is highly competitive and remains fragmented, with too many players chasing too little market share. Lenders are digitizing their business, boosting online banking and cutting branches.

State-owned Bankia SA needs to be privatized and has been linked to other Spanish lenders such as Banco de Sabadell SA, while Spanish press reports have suggested Unicaja might start shopping around again for another lender such as Ibercaja Banco SA, which is planning to list on the stock market.

Neither Liberbank nor Abanca responded to requests for comment for this article. Unicaja declined to comment.

Weak profits

The sector has drastically reduced its exposure to bad loans inherited from Spain's real estate crash, signalling that perhaps it is the right time for medium-sized banks to start looking for suitors, Manzano said.

Most banks face profitability issues, and a merger is a good way to cut costs and generate synergies, he said.

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Many of Spain's medium-sized banks are trailing their larger peers in terms of profitability. Liberbank, for example, had a return on average equity — a key measure of profitability — of 2.90% in the first quarter, compared to 10.51% for Banco Bilbao Vizcaya Argentaria SA, and a cost-to-income ratio of 72.11%, the highest among Spain's 12 largest banks.

Spain's smaller and medium-sized banks "remain way behind the level of competitiveness that they require, so there has to be some form of consolidation," Daniel Lacalle, chief investment officer at fund manager Tressis Gestión, said in an interview.

But, he said, a lack of investor support for mergers due to low bank share prices, an inability to agree on price and concerns about whether mergers will deliver on costs and profit growth will probably put a stop to many tie-ups for the moment.

"We are not going to see 'growth-for-growth's-sake' type mergers," he said. "There has to be a very, very sound logic and I think that is going to prevent many of these firms from entering into a process of consolidation," he said.

'Lean and mean'

Many Spanish banks want to create smaller versions of the nation's largest, Banco Santander SA, but they should instead concentrate on being "lean and mean," Lacalle said.

He cited the example of Bankinter SA as one of Spain's best-performing lenders. The Madrid bank has set itself apart by concentrating on affluent customers, investing in digital banking before many of its peers and not engaging in mortgage price wars.

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According to S&P Global Market Intelligence data, Bankinter had the second-best ROAE among the top Spanish banks in the first quarter, at 12.84%, and a cost-to-income ratio of 55.66%. Abanca is the leader of the pack in terms of ROAE and cost-to-income, with 13.72% and 45.93% respectively.

Analysts at Fitch noted that price and agreements on shareholder structure could be sticking points to future deals between regional banks. Other points of contention could include potential job losses and the loss of control of local branches.

"If shareholders with strong regional affiliation represent a significant part of a bank's ownership, this may become an additional obstacle to a deal," Fitch analysts said in a note.

DBRS' Manzano said that while consolidation will definitely take place, it will be at a different pace.

At the moment, banks can compete in their regions but the industry is rapidly changing, especially with advances in technology, he said.

This is different from the crisis period when consolidation was a "must" and was driven by capital purposes, he said. At the moment it is more for profitability and so there is not the same urgency.

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