“I Hope That Greater Banking Competition Does Not Make Us Forget Principles”

Bankia's CEO José Sevilla: " Values are most important that objectives"Bankia's CEO José Sevilla

Manuel Moreno Capa | I knew José Sevilla when he was a young analyst with the securities firm FG Stock Market Investments, which he joined in 1989. “The stock market had just hit its historic peak, and then spent three years falling”, he recalls. In those days, and also when he was with Merrill Lynch after they bought FG Stock Market Investments, we journalists liked calling this young analyst from whom you always learnt something. He replied with clarity and precision, and not only about his speciality bank values. A style he didn´t lose during his time in BBVA. Perhaps because he had been on that other side, of those who interpret the words and the data that the presidents and CEOs present, I get the impression that José Sevilla doesn’t talk like a CEO, but rather like an analyst, with the same clear and didactic style of before, of “when we analysts still had some prestige”. Today he is pledged to the banking sector recovering the reputation and prestige it has lost … even though with interest rates so low, competition is intensifying. “I hope that this increased competition does not make us forget our principles,” he declares.

Q: You already thoroughly understood what was happening in the banking sector and in the savings banks. Long before the crisis broke, you had already commented to me on one occasion that the savings banks were going to be the Spanish subprime … Nevertheless, although you knew the situation of Bankia was … Did you find the entity better or worse than you expected, above all when calculating how much the operation was going to cost?

A: Bankia was more or less like we thought it was. Bankia In fact, when we arrived, in the middle of May, it was clear that one of the causes of the crisis in Bankia was that the 2011 accounts had been closed without being audited. Very quickly, between the middle and end of May 2012, we managed to secure a signed audit of the accounts and we also announced the capital needs of the bank, which we calculated then as 19 billion euros. It was a spectacular figure which had a major impact. But when other issues emerged, like the Oliver Wyman report [which established the capital deficit of Bankia at 24.743 euros], the plan for a partial rescue of the Spanish banking sector, the stress tests, the Troika… And in the end, the recapitalisation was approved in November 2012 for a different figure [more than 22.4 billion euros]. The reality didn´t differ much from the original figures.

Q: In your period at BBVA, one of your principle functions was contact with analysts and major investors. What is A: called “looking after the value”. Now you have to keep doing it, although in a different way…

A: Of course. In the end, the responsibility of any management team is to create value for the shareholders. We repeat this a lot to our teams. Every year we do what we call The Tour: we go around the whole country and meet with the 2,200 branch directors to explain our plans. And one of the central ideas that we convey to them is that we are a listed company, whereas many of our employees come from the savings banks, which were the exact opposite. As I often say, the savings banks were legally undetermined structures. They didn’t have a clearly defined owner. And that responsibility of a private company to create value was a bit blurred in those unclear environments. And that means a serious responsibility now, because within Bankia this creation of value has a special aspect: we have a shareholder with 60% of the shares, which is the state, which are the taxpayers, who are those who gave us the grants. In as far as we create value for the shareholders, we are contributing towards maximising the return of these grants.

Q: It must weigh on you knowing that your principle shareholders are the more than 42 million Spanish citizens, “power investors” who had to put 22.424 billion euros on the table to re-float Bankia…

A: In the end what you have to do is the same. I try to see the positive side. To have these shareholders is more important than the possible conflicts of interest and social debates that sometimes appear: whether the companies earn more or less, or whether they ought to earn more or less… In this case it is clear that in the end to create value, be more profitable, to generate more profits, is good for Spanish society, because to the extent that Bankia is worth more, the taxpayers are going to recuperate more.

Q: Traditionally it used to be said that a banker should generate, above all, confidence. This value was destroyed by the crisis. Is the banking sector really trying to generate confidence again, or is it only fighting for market share and to end up overcoming the crisis?

A: The crisis has meant significant reputational damage, not just in Spain. And this is uncompleted business for the sector. But the bank brands continue to generate security among their clients, and we see that a lot now in the debate about digitalisation , the open business etc. We banks are still seen as secure entities. But it is true that we are suffering in the battle to give society a positive image of the banking sector. On the reputation issue we need clear ideas. We have been thinking about this a lot. When we arrived in Bankia in 2012, we had a serious reputation problem, which was complicated in the following years by the preferential shares scandal, the black credit cards scandal, listing on the stock market… The list is long…

Q: You´ve been affected by everything …

A: Indeed. When the grants were approved, in November 2012, we also already had a plan to make the entity profitable, the slogan we used in our communications seemed brilliant to me: We start from the principles. It was the moment to end the bad period of the entity. And that starting from the principles has helped us a lot. It is what we all have to find in the sector. Re-think what are the principles and values which we want to manage in the banking sector, and maintain a clear philosophy. Something else we said a lot to our teams was that the objectives cannot be achieved at the cost of the principles. The values come first, and the objectives have to be subordinated to the values of the entity if we want to improve the reputation and the image of the banking sector.

Q: But that seems difficult when we are again seeing a war of banking products , with significant offerings of loans for consumption and mortgages. I am seeing deals in some entities which worry me. I dont know if we have quickly forgotten what was done badly before?

A: Sometimes you can get that impression. Here there are always angles that we should make compatible. Five or six years ago, when their only remained five big banks in Spain, there was the opposite question: Is this concentration of banks going to reduce competition and create an oligopoly where margins are going to increase and prices going to be higher? But exactly the opposite has happened. Despite the process of concentration, the competition is still intense. And, in particular, the competition for for credit. With the current low interest rates, capturing deposits is not profitable. All the margin is generated on the credit side. While in 2013 and 2014 it was said that that the banks had turned off the credit tap … now it is being said that on the contrary the banks are too anxious to offer credit. But the total balance of credit in the system has been falling since 2008. This process will end this year or next and the credit balance will again grow in line with GDP. I hope this greater competition will not make us forget the principles.

Q: You are not going to go crazy again offering mortgages?

A: When they have asked me if Bankia is going to offer 100% mortgages, I have said no, because it is bad for the bank and bad for the client. Often the complaint has been: why did you give me this credit when you knew I would have trouble paying it? Maintaining orthodox credit policies is an insurance, it is good for the entity, for its shareholders and for its clients.

Q: What is certain, according to the data of the Bank of Spain and the National Institute of Statistics, is that in 2017 families stopped reducing their debt and began to seek more credits: non-mortages increased 6%, loans for consumption 15% and mortgages another 15% (although repayments were greater and the current balance reduced to 2%).

A: We are seeing greater activity and confidence from households when seeking credit, after ten consecutive years of falls in the balance of credit. Three or four years ago, I wondered if an economy could register GDP growth while the balance of credit fell. We have never seen this in Spain. In fact, we only saw nominal falls in credit in the 92-93 crisis, but these were isolated cases. Well now in Spain we have enjoyed three years with GDP growth above three percent… with credit falling. Which is good, because it shows we are capable of reducing debt and, at the same time, growing. Our levels of debt over GDP (for both households and companies) are similar to the European average. It is therefore normal to see a certain increase in indebtedness. Currently we banks are conceding credit at levels of 30 or 40% of what we were conceding in 2007 and 2008, and we are not going to return to the levels of those years.

Q: This uncertain political background and and cooler economic environment do not help the markets or the listed stocks. It has to be asked whether these four euros a share appear to be an adequate level for a new flotation of Bankia shares…

A: The performance of the Spanish stock market has been disappointing at the beginning of the year, despite the low or negative interest rate environment. Moreover, the banking sector has its peculiarities, above all its sensitivity to short term interest rates. But independently from this factor, in as far as company profits increase, it can be seen that the multipliers in European stock markets are not expensive. If in Europe we are capable of continuing to advance in integration and creating growth – after a 2017 which has been the best year of the last ten – that has to encourage European markets. The Ordered Banking Restructuring Fund [FROB in its Spanish acronym] placed a packet of 7% of Bankia at the end of 2017 for a bit more than four euros a share. We could see the four euros level soon, and I wouldn´t discount it again before the summer.

Q: In any case, will Bankia continue to be, as its President told the Financial Times not long ago, “the best option for anyone when you analyse corporate operations”? In other words, when you think about new banking mergers. In April there was speculation about an eventual merger with BBVA…

A: This comment by the president was trying to get across that in 2012, when we spoke about Bankia, no-one wanted to it, but now it is good news that in these moments it is an attractive bank, appetising, which could interest other entities. The process of concentration in the Spanish banking system in recent years has been the most intense in Europe. Can it go further? It is difficult to predict. It will be linked to the interest rate cycle. If the increases are delayed, there will be a greater tendency to think about corporate operations. But if short term interest rates rise towards the end of the year, or even before, that will reduce the pressure and need for integration. We already have a reasonable level of concentration. Five large entities enjoy 70 percent of market share and further concentration is not necessary.

Q: But in the US, the banking crisis closed 500 banks; in Europe “only” 50. Are there not possibilities of new mergers at the paneuropean scale?

A: For the ECB, to have paneuroean banks would be asuccess for the process of integration or banking unión. But sometimes we confuse desire with reality. It would be good if there were paneuropean banks, but you have to do things to facilitate it. We have the same primary material, the same money and the same interest rates for all the countries, banking products ever more similar, investment funds are sold equally all over Europe… all of this should help. But there are still obstacles: the regulations and tax systems in each country have significant differences. It would also be necessary that the Bank balances also need to be more similar. The ECB, as supervisor, is carrying out an important harmonising role to make the differences between reading a bank balance from a French, German or Spanish bank minimal.