The pain in Spain
Spanish bank investors have just had a painful reminder of the real estate mess that burdens the country’s banking system. Just a few months after Banca Civica listed on the stock market, Caixabank is buying the smaller lender – and its dud property loans – in an all-share deal priced at an 11 percent discount to market value. Caixabank will reap savings from cutting costs, including its own network. Without state support, though, the deal is still a risk.
Banca Civica was in a bind after the government recently tightened requirements for impaired property loans. It needed to do a deal. For Caixabank, already one of Spain’s biggest banks, the rationale is less straightforward. The combined entity will become Spain’s largest lender by assets, with leading positions in the wealthy regions of Catalonia and Navarra, and populous Andalusia.
On paper, the deal makes financial sense, giving Caixabank a good excuse to restructure its own bloated branch network. It says the combination will generate 540 million euros in annual synergies, mostly from cost savings, which have a net present value of 1.8 billion euros – nearly twice the 977 million euro price the deal puts on Banca Civica’s equity. Caixabank reckons its earnings per share will increase by more than 20 percent in 2014, excluding restructuring costs.
The deal won’t stretch Caixabank’s balance sheet too far, either. It is buying Banca Civica for a third of its 2.9 billion euro book value, and will write down the lender’s real estate assets by 3.4 billion euros. After taking into account various adjustments, including the conversion of preference shares, the hit to Caixabank’s capital will be 167 basis points. That shouldn’t impede it from reaching the 9 percent core capital ratio that European regulators require it to hit by the summer.
The key risk is still real estate. Unlike recent deals to sell nationalised lenders, Banca Civica doesn’t come with government help in the form of an asset protection scheme. The write-downs and provisions cover 62 percent of Banca Civica’s problem property assets, but this may not be enough as recession and austerity bite.
Yet these risks look small for Caixabank when compared to what might have been a much larger deal with Bankia, the recently listed savings bank which is also struggling to meet the new state requirements. After this purchase, Caixabank’s plate is full.