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Cost and price savings, keys to the success of the 'CaixaBankia' merger

2020-09-13T23:22:54.807Z


The operation heads into its final stretch with both political and financial constraintsOn Wednesday the creation of the largest bank in Spain was decided, the union of CaixaBank with Bankia, with 660,000 million in assets, 25% of the total in the sector. But this operation, promoted by the ECB and later by the Government, seeks to recover the lost profitability thanks to the cut in expenses so it could do without about 8,000 employees, 15.5% of the workforce. The Executive wants to


On Wednesday the creation of the largest bank in Spain was decided, the union of CaixaBank with Bankia, with 660,000 million in assets, 25% of the total in the sector.

But this operation, promoted by the ECB and later by the Government, seeks to recover the lost profitability thanks to the cut in expenses so it could do without about 8,000 employees, 15.5% of the workforce.

The Executive wants to avoid large layoffs, but if CaixaBank does not put the scissors, it will reduce the premium, the price it will pay to the State.

The value that Bankia contributes is based on the 24,000 million in public aid it received and most of which will be lost.

The bank lives an endless cycle of mergers.

32 years ago, in 1988, the first of the modern era took place: Banco Bilbao joined forces with Banco Vizcaya to create the leading entity, BBV.

José Ignacio Goirigolzarri already experienced that earthquake on the front line because he had been working for Bilbao for 11 years.

Three decades later, the Bilbao executive starred in the last major merger under his presidency, the possible sale of Bankia to CaixaBank.

Also now a leader would be created in Spain.

32 years ago the operation was justified by the need to seek size, solvency and profitability by reducing staff and offices;

the same objectives as CaixaBankia, which shows the permanent cycle in which banks live, as evidenced by the fact that the new giant is the result of the union of 18 savings banks and banks.

The difference is that now the resulting entity will be 13 times larger than the BBV was, a reflection of how the Spanish economy and the sector have grown.

The figures are impressive: CaixaBankia will have 31.4% of customer loans and 28.1% of deposits, according to data from last June.

It will have about 6,700 offices (28% of the total) and more than 51,500 employees (29% of the total).

But being big doesn't mean being profitable, as supervisors warn.

According to the ECB report, Euro area bank profitability: where can consolidation help?

November 2019, "the common problem of cost inefficiency seems more pronounced for the largest banks and for the smallest ones."

And it points to "banks that suffer from a combination of problems, high costs and lack of income" as those in a more delicate situation.

The fall in margins was already a problem for years (in 2016 the Euribor entered negative territory), but the economic crisis caused by the pandemic has imposed a decline in income and an increase in non-performing loans in the medium term.

Again the perfect storm reminiscent of 2008, but with much more capital and, therefore, solvency.

However, according to financial sources that request anonymity, CaixaBank and Bankia, among other entities, would enter losses in 2021 if they do not sign the merger.

The rating agency Moody's also insists on the idea that being big is not synonymous with efficient or profitable.

Last week it indicated that the estimated efficiency ratio of the merged company would be 57%, "a poor indicator compared to the average for the Spanish system, which stands at 50.1%."

Nobody doubts the first challenge of the fusion: forced weight loss.

And the Competition Commission may incentivize you by requiring closures in some over-present regions.

In Catalonia, Madrid and Andalusia there are more than 3,000 offices.

There is speculation with the departure of 8,000 to 10,000 workers through early retirement and incentivized layoffs in various years.

But the Government, which has just presented a plan to penalize early retirement, will not see well that in the midst of the crisis there are massive exits from the bank in which it is the second largest shareholder.

However, the value of the state's participation is higher the more expenses are adjusted.

And that affects another essential factor: how much will be paid for Bankia shares, the control premium.

As Íñigo Vega, an expert at the analysis firm Nau-Securities, points out, "the cost cutting will determine the premium paid and what the State charges."

The Government does not want to undersell Bankia to recover part of the 24,000 million in public aid, but then it will have to assume the social cost of the dismissals with the pressure that this will entail from United We Can.

The La Caixa Foundation, chaired by Isidro Fainé, has made it a condition to control 30% of the new bank for tax reasons, which conditions the exchange and puts more pressure on the negotiation.

The future of aid

Precisely these helps from the taxpayer lead to another of the keys to the merger: the generation of negative goodwill (

badwill

), which occurs when an asset is purchased below its book value.

The very low price on the Bankia Stock Exchange will cause it to happen in this operation.

Analysts estimate that some 8,000 million resources could be generated with which the 3,000 million that can be spent on layoffs would be paid.

It will also serve to provide for the delinquency of the covid-19 crisis, which can be high.

Some sources consider that this situation will cause a contradictory fact and that is that the State aid gives value to the merged bank controlled by CaixaBank, while the prospect of their recovery for the treasury is low.

These complex decisions will be made from the new command bridge, with managers with great experience (and success) in mergers.

It will not be easy and nobody guarantees that sparks will not fly, in the coexistence between Goirigolzarri and Fainé.

Undoubtedly, the Basque manager will use his experience in the merger of Bilbao and Vizcaya, as well as in other 30 more in which he participated.

The stakes are high.

Source: elparis

All business articles on 2020-09-13

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