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Spain: Financial sector consolidation

Another round of consolidation in the Iberian financial sector is expected in 2017. And, if only in terms of the semi-announced and widely discounted merger between Bankia and Banco Mare Nostrum (BMN), this new round does indeed seem likely. More broadly, the present map of institutions, with roughly 15 substantial financial groups (though with remarkable differences in size) is commonly acknowledged as an intermediate stage in the route towards a landscape that will be dominated probably by fewer than 10 groups.

There is every likelihood that market consensus will turn out to be right. However, there are also reasons to believe that the consolidation process may be slower than expected.

In this sector, the Iberian market tends to be self-contained. No new actors are expected and, as a matter of fact, some international players seem willing to leave the peninsula, rather than play any part in the consolidation game. In this situation, the number of institutions able to take part in the process as consolidators (the largest Spanish banks) is very low.

Given that potential consolidators are already substantially exposed to the domestic market (more so than they would probably desire), the only reasonable driver behind consolidation is the seeking of synergies. And, again, the number of institutions – in terms of those to be consolidated – that offer synergy potential for the big players is limited. Furthermore, synergies are fine as long as they do not result in extra costs.

In this situation, the right path is not obvious.

Then there is regulation. Though size (coupled with efficiency) seems to be the only answer to the question of how to make a bank viable in the zero or less-than-zero-interest rate world, with size also comes an increase in regulatory pressure. Larger institutions have to cope with capital buffers and other continuing regulatory requirements that smaller players are spared. On the other hand, although size does not necessarily mean complexity, it can become more of an issue from the resolvability perspective, and can trigger further requirements, in this case coming from the newly established resolution authorities.

Never easy, banking consolidation and the M&A activity attached to it have become increasingly demanding in recent times. Market players might be wise to take it slowly.

Fernando Mínguez

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