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Internet, low rates spur Spanish banks to trim sprawling branch networks

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Internet, low rates spur Spanish banks to trim sprawling branch networks

Lowinterest rates and digital banking's promise of slashing overheads areprompting Spanish banks to downsize one of Europe's most extensive branchnetworks.

Commentsby Banco Bilbao VizcayaArgentaria SA CEO Carlos Torres Vila on April 5 that the onset ofmobile banking could allow the bank to slash its Spanish bank network by almost three-quartersto 1,000 came just days after a union said Banco Santander SA was 425 branches in thecountry in 2016.

Atechnological shift to providing banking services online is coinciding with asqueeze on Spanish banking revenues in a low interest rate environment,prompting banks to look at slimming branch networks to reverse a trend ofrevenues failing to keep pace with expenses.

Santander'scost-to-income ratio rose by 2.5 percentage points to 53.9% from 2011 to 2015,while BBVA's ballooned by 7 percentage points to 60%. The driver for this hasbeen slack revenue rather than increased spending, but with eurozone interestrates at their lowest-ever level, banks have little choice but to look to slimdown.

WhereasSantander looks set to reduce the size of its Spanish physical network by morethan 10%, the corresponding reduction in headcount will be a small fraction ofthat, as employees are transferred to newer, bigger branches with enhancedcustomer service, a Madrid-based equity analyst said. A union saidApril 8 that Santander is planning some 460 job losses from its Madridheadquarters, on top of 1,200 announced as part of a restructuring, accordingto Reuters.

Gettingrid of staff in Spain is difficult, with local law requiring costlycompensation for those dismissed, and has to be negotiated with unions, meaningthat the cost benefits of branch reductions may be less immediate than headlinenumbers for closures might suggest, the analyst said.

"Itaffects costs in the long term, but it's not something that will change theindustry dramatically in the next three years," said the analyst, whoasked not to be named for compliance reasons.

Costsfrom laying off staff may have to be compensated by capital gains from anyproperty disposals related to branch closures, the analyst added.

Santander'snet operating income in Spain fell 15.7% year over year in 2015, and BBVA'sSpanish operating income slid 6.6%, although cheaper funding costs helpedoffset lower interest revenues.

"Theyhave to put a lot of effort into cutting costs. It's one of the few things theycan do to support their ROEs," Fabio Mostacci, an analyst at MirabaudSecurities, said in an interview.

Spain'sextensive branch networks are an obvious place to look. Tiny Luxembourgand San Marino are the only European countries with more bank branches per headthan Spain, which boasts 70 per 100,000 adults, according to World Bank data.Although Italy is not far behind, the U.K. has only 25 per 100,000 and Germany14.5, the data, from 2014 and 2013, shows.

Spanishbanks, many of which are strongly regionally based, chased loan growth byexpanding their physical presence in the boom years prior to the financialcrash, the first analyst observed. Those now retrenching their networks will bewary not to do so too quickly lest the reverse effect kicks in, the analystsaid.

UnlikeSantander, and despite its CEO's comments, BBVA has yet to announce anyconcrete plans for branch disposals, though it told unions in June 2015 that itwould close 400 branches from the recently acquired network, cutting2,000 staff. Synergies of about 40% of Catalunya Banc's cost base were set tobe balanced by restructuring costs of about €450 million.

Theconsolidation of Spain's savings banks following the financial crisis and theresulting European-funded bailout of the country's financial system has alreadyseen many branches close, after their number peaked at more than one per 1,000adult Spanish residents in 2007. But there is still a long way to go beforebranch efficiency rivals that of other European countries, even those withsimilarly sparse rural backwaters — Norway has only 11 bank offices per 100,000adults.