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Unicaja, Liberbank tie-up would give competitive edge, boost bottom line

A tie-up between Unicaja Banco SA and Liberbank SA would give them a competitive edge as they would expand their geographical footprint, cut costs and boost profits at a time when European lenders face pressure due to low interest rates, according to analysts.

It would also finance the banks' transition to digital banking and open up debt markets to help them comply with European post-crisis regulations, industry observers said.

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The lenders confirmed talks about a potential merger Dec. 12, sending their shares soaring, and UBS analysts said in a note they expected both banks' shares to continue rising due to the benefits of a deal. The combined entity would be the sixth-largest lender in Spain in terms of assets, with Unicaja jumping from eighth place and Liberbank leapfrogging from 13th place, S&P Global Market Intelligence data shows. According to Spanish press reports, Unicaja would raise capital to finance the deal, which would take place through a share swap with Liberbank shareholders.

Market consolidation

The collapse of Spain's property market and the ensuing European sovereign debt crisis led to a vast restructuring of the Spanish banking sector, with the number of saving banks falling to 11 from 45 between 2010 and 2015. Analysts said the Unicaja/Liberbank talks were a sign that more consolidation among medium-sized lenders might take place, something that supervisors back amid weak profits.

Liberbank was created itself from a three-way savings bank merger in 2011. Unicaja took over Banco de Caja España de Inversiones SA in 2014 and held an IPO in 2017 as a condition of the acquisition. The funds generated from the offering were designed to be used by Unicaja to reimburse public funds injected in the form of contingent capital securities into Banco CEISS during the banking crisis. SNL Image

Although present throughout Spain, Unicaja has a strong position in the south, while Liberbank is concentrated in the central regions surrounding Madrid and in the far north of the country. A deal would expand Unicaja's foothold throughout the Spanish market, said Javier Santacruz, an economist at the Instituto de Estudios Bursátiles in Madrid who specializes in the Spanish banking sector. This is particularly important in small and medium-sized business lending where the market has become more concentrated following Banco Santander SA's €1 acquisition in June 2017 of failed lender Banco Popular Español SA, which was one of the leading SME lenders in the country, he said.

Cost savings

Pablo Manzano, banking analyst at rating agency DBRS, said the combined entity would hold about 4% of the loan market and around 5% of deposits, based on end-September figures. Data compiled by S&P Market Intelligence shows the merged entity's total net loans at €51.07 billion and total assets of €95.97 billion.

It would be able to boost profits through cost cutting, through staff layoffs and early retirement, said Manzano, predicting cost savings at around €200 million.

"In terms of potential business attrition, the low level of geographic overlap is positive. But, at the same time, the potential cost-saving measures are more difficult to achieve if only a small percentage of the branches are in a similar location," Manzano said in an email.

A larger bank would also gain better access to capital markets to issue senior nonpreferred debt eligible for MREL, or the minimum requirement for own funds and eligible liabilities, he said. The new EU requirement asks banks to hold enough debt to absorb losses if they run into trouble. Manzano also said the combined bank could accelerate its balance sheet clean up by closing larger deals to sell nonperforming loans and nonperforming assets.

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Liberbank, one of the weaker players in Spain's recast banking sector, has been tidying up its balance sheet to rid itself from a high pile of bad loans inherited from the country's financial crisis. Its bad debt ratio — calculated by S&P Global Market Intelligence as nonperforming loans as a proportion of loans held at amortized cost — fell to 6.3% in the third quarter of 2018 from 10.8% of the same period in 2017.

The bank's success in reducing its problem loans has made it more focused on its core banking business, said Javier Bernat, an analyst at GVC Beka Finance, adding that it would not be a hindrance to the deal.

Digital transformation

Banks, in general, have been transforming their operations in the digital age, making investments in online and mobile banking, and Bernat said the banks discussing the merger could strengthen their hand in that domain.

"They have to invest quite a lot in technology and this is one of the main drags of these banks that [are] not as large as banks like Santander where there are more economies of scale," Bernat said.

"When they are larger, there are some economies of scale that help improve the sustainability of the merged bank rather than on a stand-alone basis," he said.

Manzano, however, said there was one negative with the deal as the combined bank would have to hold higher capital because it would be subject to other systemically important institutions, or O-SII buffer, as it would be the sixth-largest bank in Spain.

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Click here to see Liberbank's financial highlights.
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