Outcome uncertain as Spanish savings banks race to merge

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Spain's regional savings banks are racing to consolidate ahead of a June 30 deadline to tap a government rescue fund, but analysts warn that the outcome of such "cold mergers" is less than certain.

Under a "cold merger" each bank keeps its own brand, workforces, balance sheets and branch networks but they combine some central functions such as the monitoring of liquidity under a single management.

Formally known as a merger by System for Institutional Protection (SIP), it contrasts with a full-scale merger involving the takeover of weaker lenders by their stronger peers.

But Marc Chandler of US investment bank Brown Brothers Harriman said he had his doubts.

"It is not clear at this juncture, whether this will really lead to the kind of restructuring needed that leads to true consolidation or whether it is just superficial or cosmetic change," he said.

The "cold merger" model has been endorsed by the Bank of Spain and has proven popular with the regional politicians that control Spain's 45 savings banks. These banks have been saddled with bad loans following the collapse of the property market at the end of 2008.

Caja Madrid, Spain's second-biggest savings bank by assets, and Bancaja, the country's third-biggest, are discussing a tie-up under this model with five other smaller lenders. If successful it would create the country's biggest savings bank, surpassing Barcelona-based La Caixa.

Caja de Ahorros del Mediterraneo has already agreed to a similar tie-up with three smaller savings banks, as have Caja Navarra, Caja Canarias and Caja de burgos.

"The system of 'cold fusions' are an unknown. We will see how this will end up," said Juan Carlos Martinez-Lazaro, an economics professor at the IE Business School.

Analysts say the model leads to fewer savings than a full-scale merger as it does not lead to as many staff cuts or the closure of branches.

Another problem is that both full-scale mergers -- such as the one planned between La Caixa and Caixa Girona in the rich northeastern region of Catalonia -- and the "cold mergers" have been among lenders in the same region.

Martinez-Lazaro said "this is not ideal in terms of efficiency."

"The interests of the autonomous communities come out on top to maintain a strong group within the same region," he said.

"I hope the SIP are a first step towards inter-regional mergers that allow for gains in size and competitiveness," he added.

Global financial markets have turned their focus to the health of Spanish banks in the wake of the Greek debt crisis, which has raised fears that Madrid may also need an international rescue package like the one Athens received.

Spanish lenders are being frozen out of the international inter-bank market because of growing risk aversion among financial institutions over the debt crisis in Europe, Spanish business daily Cinco Dias reported on Wednesday.

The Spanish government has encouraged consolidation of the savings banks -- which account for half of all lending -- in order to maintain their liquidity.

It set up the Fund for Orderly Bank Reconstruction last June after the Bank of Spain was forced to take over the running of savings bank Caja Castilla de la Mancha to help struggling saving banks merge or restructure.

The rescue fund, made up of public money and other existing central bank support funds, was capitalised initially with nine billion euros, which can be increased 10-fold if necessary.

The Bank of Spain's proposal to tighten rules on provisions the lenders have to make against real estate on their balance sheets has added to the pressure on regional savings banks to merge.

The pace of merger talks picked up last month following the central bank's move to take control of troubled of CajaSur, another troubled regional lender.

© 2010 AFP

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