It doesn’t look as if the markets were any too happy about what happened on Sunday in Barcelona. And they are beginning to have doubts about the comments, analysis and reports from the big investment banks which, up to a few days ago, swore “there would be no referendum”.
For example the case of Citigroup, which believed the referendum was unlikely and independence impossible, or UBS, which told its clients that “secession seems very far off for Catalonia, if indeed it ever happens.” Even Sabadell chairman, Josep Oliu, relentlessly insisted that the possibilities of independence flourishing are zero.
And so, the worst has happened. There was a referendum, although it was ilegal, and the worst thing are the pictures of the riots and the police charges, which burst on to television screen across Europe. All this has ended up fuelling concern amongst investors which, for the time being, we don’t know whether it will continue or not, given that everything depends on what will happen in the coming days.
The Ibex was one of the biggest losers in Europe, down 1.3%. Meanwhile the FTSE 100 or the German DAX rose slightly, but they did rise.
At the moment, the stocks which are suffering the most are the banks, all of them posting losses, particularly the Catalan lenders. While BBVA, Santander, Bankinter or Bankia fell 2.37%, 1.61%, 1.02% and 3.33%, CaixaBank and Sabadell dropped 4.43% and 4.53% respectively. And whilst Santander, BBVA and Bankinter have shown a certain propensity to rise in the last two or three weeks (with ups and downs, of course) the two Catalan banks have seen a huge amount of volatility. CaixaBank has gone from around 4,4 euros per share in the last month to 4 euros, and Sabadell from 1,8 euros per share to 1,68 euros.
The reason why these two banks have been battered by investors is explained very simply by the fact that their headquarters are in Catalonia. And they would be seriously and severely affected by the region’s eventual independence. It’s true that BBVA is the second biggest bank in Catalonia, but it has its HQ outside and is very much an international bank (with most of its business outside Spain). So it would suffer the impact of independence less than the other two.
But it would still suffer. According to the reports published up to now, the banks with a presence in Catalonia, whether they have their HQ there or not, could suffer in various ways. The first starting with a withdrawal of deposits and a possible corralito as happened in Argentina, which would cause a liquidity crisis and could lead to the local banking system going bust.
Another risk is that independence and the possibility that Catalonia had to issue its own currency – since it would be out of the euro – with depreciation more than likely, would also fuel huge losses. And, furthermore, the drop in GDP would also depress the banks’ business in the region, with NPLs definitely rising.
Given this possibility, any bank might try to pull out, or sell its operations, something which would be very difficult at the moment. The only way out would seem to consist of converting the Catalan business into a legally separate subsidiary.
The damages for the two local banks, if they keep their HQ there, would be much more serious. Being out of the euro, the country would no longer be under the rule of the ECB. It would no longer monitor and supervise the Catalan banks, which would have no access to liquidity and would be marginalised, obviously, in the capital markets. Nobody would lend to them, at least at acceptable prices.
Continuing to have its HQ in Catalonia would also put the bank’s business in the rest of Spain at risk. This is very serious because, for example, two-thirds of CaixaBank’s business comes from outside Catalonia. And Sabadell much the same. Thus, in order to avoid investors’ taking fright, the two local lenders already warned the big international investment banks some time ago that they were prepared to abandon Catalonia, in the event the region became independent.
On the one hand, changing their HQ to any other autonomous region in Spain would mean both banks would still have access to the ECB’s liquidity auctions, key to their banking activity. On the other, it would keep their clients under the protection of both the national and European Deposit Guarantee Fund.
CaixaBank has acknowledged this possibility. It’s a bank which has always resisted the Generalitat’s attempts to control it and has already taken specific measures. It even has a possible way of facilitating its “transfer”. Its subsidiary Microbank, which has its HQ in Madrid since 10 April 2013, and has a banking licence – authorised by the Bank of Spain – to operate throughout the country.
Sabadell has shown itself to be even more forceful. Despite stating, like everyone else, that Catalonia would never declare independence, Sabadell chairman Josep Oliu has made it clear that if this happened, the bank would immediatly transfer its HQ outside the region, in a matter of hours. He has also made it clear that his bank’s HQ must always be within the European Union.
This stance provoked very obvious hostility from the whole of the independence camp which made him a target. Joan Tardà, an MP for the ERC party in Congress, even accused Oliu of “moral poverty” for trying to issue threats “to condition the referendum vote”.
So this eventual scenario appears relatively controlled, which should calm the markets as far as the two Catalan banks are concerned. But of course, as we said, this is only half the story. The Catalan market is important both for CaixaBank and Sabadell. And if it deteriorated, their balance sheet would suffer too. Whether or not they move their HQ to Madrid.
In any event, perhaps it’s early to sound the alarm bells. The fact the other markets continued to rise while the Ibex fell, shows that Catalonia is still far from becoming a systemic risk for the EU.
And in the end, the losses registered by the most exposed banks have not been too serious. Although a drop of 4.5% is a lot, it’s not that much compared with what could still be on the cards. Everything depends on what happens in the next few weeks. And nobody has the slightest idea. Maybe not even Rajoy and Puigdemont.