Sabadell weighs options as bank deals quicken

Bloomberg

Spain’s Banco de Sabadell SA is exploring strategic options as consolidation talks take hold in Europe’s fragmented banking markets.
The lender, based in Alicante, has been working with Goldman Sachs Group Inc. in recent months on options including a sale or merger, asset disposals or buying a smaller competitor.
The bank is looking at deals that would allow it to save costs and reduce exposure to small and medium-sized business loans, the people said, asking not to be identified as the plans are private. Discussions have also looked at options for its UK business TSB Banking Group Plc.
European banks are considering deals to contend with low profitability, fierce competition and the prospect of soaring bad loans as government aid programs to combat coronavirus come to an end. CaixaBank SA and Bankia SA late last week said they were in talks to create the largest lender in Spain by loans, assets and deposits in what may kick-start more deals in the country.
Sabadell could still opt against pursuing any deal and no final decision has been made, according to the people. The bank’s shares rose as much as 3.8% in early Madrid trading on Wednesday, giving it a market value of $2.6 billion.
Under pressure for years, banks across Europe are weighing options and preparing for cross-border consolidation. Italy’s Intesa Sanpaolo SA is taking over domestic rival Unione di Banche Italiane SpA to bulk up and prepare to play a bigger role once larger European deals start to take place. Societe Generale SA has indicated that it wants to play a role in European consolidation and Deutsche Bank AG and Commerzbank AG last year held failed talks on a combination.
The impact of the coronavirus is now giving extra impetus to talks, according to industry executives. Deutsche Bank Chief Executive Officer Christian Sewing said at a conference recently it would be likely accelerate consolidation, echoing Sabadell Chief Executive Officer Jaime Guardiola who said in July that the pandemic has created “a climate” for mergers.

Sabadell sold its asset management business last year to Amundi SA on pressure to boost its capital buffers. The bank is also under scrutiny from investors to turn around its U.K. unit TSB, which has been loss making in the past years.
Smaller Spanish lenders Unicaja Banco SA and Liberbank SA also came close to a deal last year before talks collapsed. The talks failed as regulators urged the banks to improve capital buffers which have since improved.
Spanish banks, which are mainly focused on retail and selling mortgages and consumer loans, have been especially affected by the European Central Bank’s policy to keep rates negative over the past five years.
The Spanish banking sector also has one of the highest concentrations of branches in Europe. It had 55 branches per 100,000 adults in 2018, according to the World Bank. That compares with 35 per 100,000 in France, 41 per 100,000 in Italy and 11 per 100,000 in Germany.
The European Central Bank, aware of the problems facing the region’s banks, is seeking to make it easier for lenders to pursue deals. The watchdog said in July that merged banks don’t automatically face higher capital requirements and that accounting gains can be used to help fund combinations as long as it makes the bank safer.
Recent announcements about domestic banking deals signal how banking consolidation may pan out: that big lenders with strong capital buffers snap up smaller rivals as opposed to mergers of equals or large cross-border deals.
European banks still face a series of regulatory and legal hindrances to dealmaking in other parts of the region. The first issue that bankers cite is the difficulty to move capital and liquid funds from their foreign units back to headquarters, but differences in insolvency law between countries is also a major headache.
European governments are working on completing a so-called banking union, but negotiations have been bogged down in recent years over concerns that richer countries will end up paying for risks at banks in poorer ones.