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Jordi Gual, CaixaBank |
European central bankers, in an effort to distract attention away from the damage to banking profitability and to banking system stability caused by their prolonged repression of policy rates, are encouraging mergers and acquisitions with increasing urgency.
Peter Praet, executive board member of the ECB, has added his voice to this swelling chorus advocating sweeping consolidation in a speech in Madrid in October, acknowledging the signs of vulnerability among European banks evident from alarmingly steep discounts to book value ascribed to them by equity investors.
“Further rationalization of branches and consolidation of entities appears necessary,” says Praet. “But in a truly integrated euro area banking sector, what I would ideally like to see – as a medium-term goal – is such consolidation to go hand-in-hand with greater geographical diversification.
Which is to say: banks achieving economies of scope and scale from cross-border mergers and acquisitions, while also deepening macroeconomic risk-sharing by diversifying country risks.”
For years now, even the better European banks have been struggling to achieve returns on equity much above 5%, while the volatility of their share prices implies a cost of equity twice that. There aren’t many banks brave enough to expand across borders, where cost synergies are hard to achieve, with equity investors so disheartened.
An exception
One exception is Barcelona-based CaixaBank, the leader by market share in Spanish retail banking, whose prolonged efforts to take control of BPI in Portugal achieved a breakthrough in September when BPI shareholders approved removal of the voting cap that restricted CaixaBank, with a 46% holding in the Portuguese bank, to exercising voting rights equivalent to just 20% of BPI’s capital. With that cap now removed, CaixaBank is proceeding with a mandatory tender offer for the remaining shares of the smaller bank.
Euromoney asks Jordi Gual, chairman of CaixaBank since July, having previously been executive director of strategic planning and chief economist, whether this move in Portugal may be the prelude to a new round of European expansion. His answers will not encourage Praet and other policymakers pushing mergers and acquisitions as the solution to European banks’ woes.
“I am a down-to-earth kind of guy and not given to grandiose visions,” says Gual. “As chairman, I intend to keep this bank steady and ensure that we continue to serve customers and shareholders well, to provide employment, maintain our good reputation and enhance earnings, so that if there is further large-scale banking consolidation across borders in Europe, say in five years’ time or more, we are in a position to participate.”
But right now, he suggests that coping with mis-steps of regulators and policy-makers is the more pressing concern. He starts with Basel IV. “I am very concerned that the Basel committee now seems intent on changes that undercut the risk sensitivity of advanced models that banks were encouraged to use under Basel II and that those changes may burden lenders with greater regulatory capital requirements while the banking system is still struggling both to resolve legacy non-performing assets and lend to the real economy.
“And this is not special pleading,” he insists. “Among leading European banks, CaixaBank reports one of the highest densities of RWAs to assets, at close to 40%, while some other banks are at around 25%.
“So, I can understand why the supervisors may have concerns about very low densities reported by certain banks. But I think it would be much better to go to those banks individually, ask them to explain their models, perhaps put them on notice. Instead, however, I sense that regulators are overwhelmed by this task. Big banks are complex operations that don’t run just one advanced model each. They may run many and I suspect regulators are not confident in their own ability to take these apart and test them and so they are formalizing new floors across the whole system, which I think is ill advised. This is the kind of approach it might have been much better to prepare for years from now, only after banks have resolved their legacy issues from the recession that followed the financial crisis.”
Bail-in problems
He has similar concerns about the new bail-in regime supposedly now in effect across Europe. “The problem with bail-in is that while it all sounds sensible in theory, in practice it raises all sorts of problems, especially where banks have distributed bail-inable subordinated instruments to retail customers,” Gual says. “The danger, of course, is that when customers see the possibility of bail-in approaching for one instrument of a particular bank that it creates a run on other instruments, including deposits, and possibly of other banks. We warned the European Commission about this. Bail-in instead of public bailouts is a fine idea, but for the future.”
Gual adds: “On top of bail-in we also have uncertainty over capital for banks that own large volumes of domestic government bonds. This creates uncertainty in the eurozone when it still doesn’t have a single risk-free asset. Before all these new regulations enter into force, we have to deal with legacy issues.”
While agitation for independence continues in CaixaBank’s home base of Catalonia and Europe prepares to negotiate with the UK over withdrawal from the EU, Gual suggests that the consolidation Praet and other European policymakers are urging will only be possible after closer political union.
“Economists have always been clear that monetary union only makes sense as part of a move to closer political union,” he says. “It is only when we have that – including some kind of risk-sharing in a single, sovereign risk-free asset – as well as greater commonality in national bankruptcy codes and accounting that you might see big banks in one large European country consolidating with peers in others.”
He concludes: “We are looking to complete a deal with BPI in Portugal, our close neighbour. But that may be as far as we will look for now.” And he adds: “Consolidation within Spain is not over yet. The market does not grow and therefore there is still some excess capacity.”
Cost cutting
As chairman, Gual can expect to face greater demands from analysts and shareholders to cut costs in response to lower-for-longer revenues, even though CaixaBank boasts one of the better cost-to-income ratios among large Spanish banks already. Analysts want the bank to get on quicker with so-called pre-retirement agreements to ease out older, more experienced staff and to continue to replace them with cheaper employees and with machines through digital transformation.
Gual won’t be browbeaten on this, however. He says: “We track cost-to-income of course, because the whole industry does, but it is just a measure of operating profitability. If economic growth gains momentum and loan demand increases then income shoots up and your cost-to-income looks fantastic. But I’m not sure that really tells you that you are a much more efficient operator.
“We will not try and boost returns in the short-term by positioning this bank as a low-cost provider. Low cost often means poor quality of service. We believe that it is the high-quality of our service that distinguishes this bank and has taken us to a leadership position.”
