Spanish banks offer high rates, plus free iPads, TVs

Spanish banks are offering high interest rates plus free iPads, TVs and Blu-ray recorders in a knock-down battle for customers, prompting deep concern in the government.

Madrid may now call an end to the fierce competition for fear of the damage it may wreak on the bottom lines of Spain’s banks, many still mopping up the bad loans from an exploded property bubble.

An array of gifts are on offer to lure customers to transfer their accounts: an iPad at Banesto, a flat-screen TV at Caixa, a video game console at Santander and a Blu-ray player at Caja Madrid.

The battle has intensified recently but it is not new for Spain, said Carmen Ortiz, head of investor relations at Banco Popular, the third-largest listed bank.

"I have worked 20 years at the bank and I have always seen this," Ortiz said.

The authorities are concerned about astronomical rates on offer for new deposit accounts: 3.5 percent, 4.0 percent, even 4.75 percent a year. Many other European countries offer no such returns, nor gifts.

This generosity "has introduced a new element of pressure on the financial results of Spanish credit entities," still recovering from the collapse of a property bubble in 2008, said the Bank of Spain.

Moreover, banks were starting to offset these higher costs with an increase in interest rate charges for loans.

Banco Popular confirmed it had "transferred" this extra cost to short-term business loans, with no regrets.

"We have captured almost three billion euros in deposit accounts since the start of the war last year and we have gained more than 340,000 new customers," said the bank’s Ortiz.

"In three years we have reduced our dependence on the interbank market by more than 15 billion euros."

That, in fact, is the main motive. Financial markets, worried about the strength of the Spanish economy, have tightened and in some cases closed off entirely banks’ access to the interbank market for overnight loans, their classic financing mechanism.

So banks are turning instead to the general public.

The advantage, according to the IE Business School’s financial sector director, Manuel Romera, is that banks can diversify their portfolios and escape an interbank market dependant on a more limited number of actors who can impose their own conditions.

But "in this headlong rush, banks are paying higher interest rates on deposit accounts than they get for loans, so in the end they lose," said Romera. That is especially true for those banks that have a lot of mortgage loans, which are long-term and cannot be re-negotiated.

Already since January, those banks that have received public aid have been banned by the Bank of Spain from entering into these "aggressive sales policies."

The government now wants to prevent all banks from offering interest rates more than 1.5 percentage points above the six-month Euribor rate, the benchmark for the eurozone, which would mean a ceiling of about 3.2 percent.

A decree will be approved "in the coming weeks," said the state secretariat for the economy.
The plan has not gone down well with banks.

"It would be a backwards step to go back to a situation like the 1980s with regulated interest rates and generally a great degree of economic interventionism," said a spokeswoman for the Spanish Banking Association.

Katell Abiven / AFP / Expatica