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Spain’s emerging banking sector

The Spanish banking sector is undergoing a significant transformation. Consolidation, de-leveraging and shadow banking are creating new opportunities

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The Spanish banking sector is undergoing a significant transformation. Over the past two years, the sector has seen a significant restructuring due to the financial crisis. Also, new regulations enacted at several levels – relating to capital adequacy, valuations, governance, supervision, indebtedness, products, consumers' protection, risk control, intervention, liquidation, and so on – is reshaping the sector dramatically.

The following new features are already creating broad opportunities in Spain:

  • Consolidation: Saving banks have been transformed either into banks or foundations. There have been many amalgamations and mergers among financial entities (voluntarily or forced), and others have been intervened or received public aid. As a result, there are now few local true players (mainly eight to nine groups, three of which have diversified internationally). Businesses are in need of credit and interest costs have increased significantly.
  • Externalisation: Banks will be more focused on traditional retail, which services will be performed more efficiently. Specialisation will be a must. Non-core business are being sold to investors (insurance business, recovery platforms, pensions, back office, credit card business, asset management, real-estate brokerage, stock markets brokerage, IT and many others). This process will continue in 2013. Teams are being reduced and more offices are expected to be closed.
  • De-leveraging: Banks are also selling their loan portfolios and are reducing their funding positions in relation to the European Central Bank (ECB). It is also true that Spanish banks have recently successfully issued bonds, which have been oversubscribed due to the market appetite. Thus, the good news is that international markets are open again for Spanish banks.
  • Shadow-banking: This phenomenon is quite new in Spain. Never before have non-banking entities (particularly foreign) been so active originating loans and acquiring unsecured and secured portfolios. Moreover, loan funds are being created. The reason for this appetite is that interest rates may exceed 10% for certain transactions. Hybrids and tailor-made financing with a piece of equity are often a good alternative. However, be alert since it is possible that in the future some EU level regulations may apply to these entities. In fact some of these entities are thinking of acquiring a banking licence, although now they do not need it strictly for their activities in Spain as opposed to other EU jurisdictions (only collecting funds from the public is a reserved banking activity).

In this context, the Spanish so-called bad bank (also known as SAREB which, ironically, is neither a bank nor harmful) has been operative since December 31 2012. It plans to sell all impaired assets (at present €36 billion, but further contributions of €15 billion is expected at the end of February) within a 15-year period, and be profitable. International investors are showing great interest in both SAREB and, of course, its assets. Trust schemes (FABs) may be an efficient alternative. All of this should be materialise soon.

Iñigo de Luisa

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