Savings banks mergers in Spain

Spain's 45 savings banks could see their numbers halved by mid-year if the 11 mergers in the pipeline come to fruition.

After riding a decade-long wave of a credit and property sector boom, the savings banks - which account for about half the financial system - are now paying for their excesses with deteriorating asset quality and falling profits.

As they are largely unlisted, the small lenders are unable to raise capital to weather the storm and maintain a solid level of provisions against soaring property-related bad loans.

Property developers owe Spanish banks more than 300 billion euros and refinancing of this debt through debt-for-asset swaps has loaded banks with unsold property portfolios.

The Spanish government, the main opposition party and the Bank of Spain have all agreed the restructuring of the regionally controlled savings banks is a key element in ensuring Spain exits the recession and returns to growth.

Following are the main aspects of the sector restructuring process:

THE MERGER PROCESS

The Bank of Spain's proposal to tighten rules on provisions the banks have to make against real estate on their balance sheets has been a catalyst for savings banks mergers, according to market experts.

Sector consolidation was accelerated when the Bank of Spain decided to take control of savings bank CajaSur on May 22.

Some of the banks plan to tap the Fund for Orderly Bank Restructuring (FROB) set up by the government last June to facilitate the mergers and encourage strong banks to help weaker rivals. The FROB has up to 99 billion euros and expires June 30.

FULL MERGER vs VIRTUAL

The savings banks have opted either for full scale mergers - involving the takeover of weaker banks by their stronger peers - or a System for Institutional Protection (SIP).

The SIP, or so-called "virtual" merger, is a half-way house, where each bank retains its own governing body, balance sheet, legal structure and brand. The operation is popular with the regional politicians who control the savings banks.

FULL MERGER PLANS

La Caixa – Caixa Gerona

The new merged group, with combined assets of almost 280 billion euros and its base in Catalonia, northeast Spain, will become the country's third largest bank after the top two retail banks Santander and BBVA.

FROB funds are not required for this operation to prosper.

Caixa Galicaia - Caixanova

This group, with combined assets of more than 70 billion euros and based in Galicia, northwest Spain, is expected to ask the FROB for 1.162 billion euros.

OTHER FULL MERGERS

Caixa Catalunya, Tarragona and Manresa

Caixa Sabadell, Terrassa, Manlleu

Cajasol, Caja Guadalajara - first inter-regional

Unicaja, Caja Jaen

Up to now, the savings banks involved in mergers have asked the FROB for a combined about 8 billion euros in funding.

SIP PLANS

Caja Madrid, Caja Insular de Canarias, Caixa Laitena, Caja Segovia, Caja Rioja and Caja Avila

Spain's second largest savings bank Caja Madrid has asked the FROB for up to 3 billion euros to fund this merger, according to a source close to the operation.

The combined assets of the new group will be more than 225 billion euros.

OTHER SIP PLANS

CAM, CCM, Cajastur, Caja Cantabria and Caja Extremadura

Caja Espana, Caja Duero

CAN, Caja Canarias, Caja Burgos

Caixa Penedes, Caixa Murcia, Caixa Baleares and Caixa Granada.