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Liberbank remains hot target for takeover despite Unicaja merger failure

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Liberbank remains hot target for takeover despite Unicaja merger failure

While Liberbank SA's recent merger plans may have fallen apart, the Spanish midsize lender remains a potential takeover target, according to analysts.

The lender had been in merger talks with Unicaja Banco SA, which broke down in May, and its CEO, Manuel Menéndez, told analysts during a recent earnings call that it remained "open" to merger opportunities, noting that consolidation could "drive shareholder value."

The Madrid-based bank has long been considered as one of the weaker links in Spain's recast banking sector and had been struggling with a large pile of bad loans inherited from the country's real estate boom and bust, and subsequent financial crisis.

It raised €500 million in 2017 to boost its coverage ratios and speed up the sale of its nonperforming assets and has made significant progress in reducing nonperforming loans. Its percentage of NPLs to loans has declined to 5.04% in 2018 from 23.65% in 2014, according to S&P Global Market Intelligence data.

But that is not quite enough to survive alone, analysts said, and it will likely need to find another suitor as it seeks to eke out profits in a heavily banked market where earnings are under pressure from low interest rates, high competition and a move to digitalization.

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Interest rates

"Whilst the bank has made progress in cleaning up its NPA exposure, achieving the targets of its NPA reduction plan quite efficiently, [it] remains negatively impacted by the low interest rate environment on the earnings side," Arnaud Journois, vice president at the Global Financial Institutions Group at rating

agency DBRS, said in an email.

"The current balance sheet would provide a cleaner base for a potential sale," he said. "Finding the right suitor could potentially help the bank improve its profitability through revenue and cost synergies, given the persisting low rate environment."

While the bank's net profit bounced in 2018 after a loss in 2017 on impairment charges, the €110.0 million net profit figure for 2018 remains lower than that of 2014, 2015 and 2016, according to S&P Global Market Intelligence data.

Margins at the bank remain low, standing at 1.33% for full year 2018, according to S&P Global Market Intelligence data, up from 1.22% in 2017, but almost at 2015 levels of 1.31%. Although medium-sized Spanish lenders such as Liberbank may have diversified their operating income by increasing sales of fee-generating products such as asset management and insurance, it will not be enough to offset pressure on their interest margins over the next 12 to 18 months, Moody's analysts said in a note.

Merger opportunities

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The landscape of the Spanish banking sector has rapidly transformed since the financial crisis, with the number of savings banks falling to 11 from 45 between 2010 and 2015. Liberbank, the 12th-largest Spanish bank by assets, is itself the product of a three-way banking merger, and analysts said further consolidation between medium-sized lenders such as Liberbank, Unicaja, Ibercaja Banco SA and ABANCA Corporación Bancaria SA is going to be on the cards. Abanca, Spain's 10th-largest lender, planned to bid for Liberbank, but then withdrew its offer, and Menéndez said he had no further comment to make on Abanca.

Mergers between medium-sized lenders "could help improve profitability through revenue and cost synergies, given there is limited geographical overlap between them, as well as providing better access to capital markets, which will be critical given the need for new issuance to meet regulatory requirements," Journois said.

"Liberbank offers the opportunity of a rather large network of branches in the central regions around Madrid and the north of the country, without too much overlapping with other entities in Spain on the rest of the Spanish territory."

Moody's said some kind of combination of either Liberbank, Ibercaja, Abanca or Unicaja would not only provide the enlarged group with greater market share, but it would also "bring opportunities to unlock cost synergies and efficiency gains by centralizing group services and streamlining the commercial network, as well as to generate economies of scale in terms of digitalization and IT investments."

Ibercaja plans to list its shares by end 2020 and could be a potential merger candidate, the analysts said.

Capital

Capital, however, could be an issue, as a merger would suppose a capital increase to back up lenders' restructuring and further bad asset sales, Moody's analysts said.

Planned measures by Liberbank to further strengthen its capital levels could place it on a good footing, they said, "This will lead to a material capital improvement in capital metrics thanks to a reduction in risk-weighted assets." However, the analysts said there were not expecting a significant turnaround because the bank plans to use excess capital to cut costs and pay dividends. The bank's common equity tier one ratio — a key measure of financial strength — stood at 13.75% in 2018, up from 13.26% in 2014.

Foreign banks

Foreign lenders are unlikely to demonstrate any interest for the Spanish lenders, given the current obstacles to cross-border mergers and acquisitions within the EU, Journois said.

"While foreign banks could potentially be interested in penetrating the Spanish banking sector, the general trend to date has been consolidation among Spanish entities themselves, either a large lender acquiring a smaller one or mergers between medium-sized ones," he said.

"Cross-border M&A is still challenging within Europe, and realizing synergies from the acquisition of a relatively small Spanish bank would likely be challenging," he said.