The Spanish financial system is undergoing a tremendous restructuring because the economy’s dramatic drop in activity. We are clearly going towards a smaller country in economic terms that will obviously need a smaller financial system.
However, financial institutions are in a spiral of mergers and concentrations to go bigger. Just one bank, Santander, is not playing that game and so far has avoided the temptation to buy into the housing sector. According to its balance sheets, it is the bank that more and better it is taking advantage of the savings banks collapse.
In the last few weeks, large banks have presented their data from the nine first months of the year, which give us a broad picture of the current state of the Spanish financial system. Numbers say that Santander is offering the best profitability conditions, quality of risk and efficiency while BBVA is in second place, although the gap between them will be expanding as the crisis becomes more persistent.
If we take a look at the results we may draw the following conclusions:
Profitability The Santander Group presents a net margin, or profit before provisions, of 18.184 billion euros, representing a 1.398 of their total assets, amounting to 1.3 billion euros. BBVA is close in this ratio, 1.394, affected by the integration of Unnim, which brings more volume than performance. That profit before provisions of Emilio Botín’s group is larger than BBVA (9 billion euros), La Caixa (2.586 billion), Popular (1.639 billion), Bankia (1.457 billion) and Sabadell (970 million) together. It still has 2.5 billion euros to spare, where the rest of the financial system would fit.
It is easy to think that this is due to its expansion abroad and to the huge business it has in countries such as Brazil, Mexico and the United Kingdom. However, the difference is bigger when it comes to business in Spain. The Santander group generates a profit before provisions of 3.809 billion euros, representing a 1.15% yield of their assets in Spain. BBVA generates a margin net of 2.972 billion euros in Spain, 0.92% on its assets. Among the rest of large entities, only Popular presents a margin on assets of more than one point, a 1.03%; while La Caixa is 0.75%, the Sabadell at 0.59% and Bankia at 0.50%.
This capacity of generating results reveals to what extent each institution can absorb higher provisions in the future shall the deterioration of the quality of the asset continue. That is to say, if late-payment rates continue increasing, or greater benefits and, therefore, dividends, are created.
Quality of risk Again Santander has the large banks’ lowest delinquency rate, either as in a group or as in a business in Spain. Botín’s group has a delinquency account rate of 4.3% on the whole and 6.4 in Spain compared with a 4.8 for BBVA and a general 6.4 for Spain; Popular (7.8%), La Caixa (8.4%), Sabadell (8.5%) and Bankia with an out-of-control 13.3%.
When we analyze the provisions that each entity has made we find a similar state. The Santander group has made provisions covering 70% of defaulters, coverage which remains at 65% for business in Spain. BBVA is around 69% for the group and 59% in Spain. La Caixa is 60% and the Popular at 43.7%.
Sabadell and Bankia data should be taken to the benefit of inventory, though for opposite reasons. Bankia says it has a 71% coverage, which has caused huge losses to the bank until it gets a 20 billion-euro public injection. The Sabadell presents a coverage of 15.7%, but we must remember that it has an asset protection scheme by which the deposit guarantee fund shall bear an important part of the failed assets of the CAM.
It is important to mention that during several quarters, BBVA was accusing its competitors, especially Santander, of hiding delinquency by the acquisition of buildings from large developers. The truth is that now BBVA has a bigger delinquency rate than Santander and also more real estate, not only because of the integration of Unnim. Santander has 8.277 million euros in foreclosed buildings, going down, while BBVA has 11.679 billion, 8,400 of which are its own, and numbers are going up.
Efficiency The champion remains the Popular bank, with a 43.8 per cent and is undergoing improvements via adjustment of costs with the integration of Pastor bank. Santander is close with a 45.4%, then BBVA with 47.4%, La Caixa with 49.7%, with 54.4% Bankia and Sabadell with 54.9%.
Bankia and Sabadell have a hugetask closing offices and laying off staff members. Bankia will need to stick to Brussels’ command whereas Sabadell, in addition to what already it has also has been required to do by Brussels, will need to watch its balance sheet.
Sabadell is believed to be winning the game to the Popular. Sabadell is seen as the winner in the restructuring of the banking sector since it has swallowed the CAM caja with a few “subsidies” from the sector that are enough to cover the huge amount of toxic assets it has taken in the operation. The public opinion regards Popular bank as a loser because of the huge capital increase it has to make in the coming weeks after Oliver Wyman consultants’ report.
However, if we compare Sabadell’s to Popular data, the first one is clearly in a worse position. Both banks have very similar numbers. Around 160 billion euros in assets, 110 billion in loans and 80 billion of deposits. According to media reports, the Popular has 150 offices more, a total of 2,280 and Sabadell 1,600 more employees, up to 16,400. Despite many similarities in size, the Popular generates a margin of interests of 2.103 billion, exceeding by more than 50% the Sabadell’s, which is 1.380 billion. This difference grows after taking off operational costs and checking profit before provisions: the Popular has 1,639 billion, which is almost double the 970 million of Sabadell.
Temptation The Spanish financial system is facing a complete restructuring process. Taking a look at the results in the third quarter, they clearly express that Santander is doing well not surrendering to the temptation of going bigger, not frantically going shopping as other banks have done in Spain. It has been tempted every day, either to buy the network of Caixa Penedès, of Banco de Valencia–which was theirs for decades–or the nationalized savings banks in Galicia and Catalonia.
The question is whether Mr Botín and his team will be able to keep that philosophy in mind and stay away from the pressure of Spain’s Central Bank–indeed, there will be pressure. We shouldn’t forget that Santander is managed by the team that has made more acquisitions in the history of the Spanish banking sector.
For now, their strategy is impeccable as evidenced by the fact that not only it generates higher margins and profit before provisions, but also it is the largest group in Spain by deposits, with 172.400 million euros, followed by La Caixa with 158,000 million, BBVA with 122,000 million, Bankia 111,500 million, Sabadell with 85,000 and Popular with 82,000 million. In credits, Santander is the third, with 199,000 million, behind La Caixa (217,000) and BBVA (210,000). And in assets, second with 331,000 million, behind La Caixa (344,000 million) and ahead of BBVA (322.000 million).