Judy MacInnes: Bailout of Spanish savings bank may be first of many

In a grim reminder of the problems dogging the largely unlisted savings banks, which are most exposed to Spain's property sector slump, the Bank of Spain said at the weekend that it had taken control of CajaSur after its planned merger with peer Unicaja failed.

The Bank of Spain will tap the government's Fund For Orderly Restructuring (FROB) to bolster CajaSur's balance sheet with an initial 550 million (472.7m), but the bailout could reach 2 billion, according to reports yesterday.

The Bank of Spain's move is a salutary warning to other savings banks that they also risk being taken over if they drag their heels over mergers ahead of the FROB expiry date of 30 June, said Santiago Carbo Valverde, an economic analysis professor at Granada University.

However, the rescue arrived at a bad time for the Spanish government, which last week announced a 15bn austerity package to repair public finances and jitters spread over Greece.

Investors fear that bank balance sheets in some eurozone countries could deteriorate to such an extent that the government will struggle to bail them out.

"We believe the intervention is quite negative news for the financial system, for the sovereign risk profile and for the economy in general," Credit Suisse analyst Santiago Lopez said in a note to clients.

Losses at the savings banks – known as cajas – could cost the state, via the FROB, 43bn, Morgan Stanley analysts estimated last month.

The news weighed on Spain's listed bank shares yesterday as concerns re-emerged over the health of the country's leading financial institutions still reeling from S&P's sovereign ratings downgrade last month.

At around noon yesterday, shares in Spain's biggest bank Santander fell 2.63 per cent to 8.37, while BBVA fell 2.91 per cent to 8.47.

However, analysts said the stability of Spain's financial system was not at risk.

"Foreign investors could be reading the CajaSur intervention as a signal that further bank bailouts could be on the cards and are extrapolating the savings banks' situation to the rest of the system. But there is no foundation for this," Renta 4 bank analyst Nuria Alvarez said.

The problems of the cajas are well known, and the Bank of Spain says it wants to more than halve the number of ailing small lenders to about 20.

The FROB was created after the Bank of Spain took over Caja Castilla La Mancha last March and has up to 99bn at its disposal to facilitate mergers between the small lenders.

But disagreements over cross-regional tie-ups and local politics have snarled the consolidation process, however, in a similar way to that facing Germany's Landesbank.

Spanish banks have largely weathered the global financial crisis thanks to strict regulatory oversight, but the bursting of a decade-long housing bubble has left them with a more-than 300bn debt hangover.

The country's savings banks – which hold half the assets of Spain's financial system – are seeing profits eroded by soaring bad loans as real estate developers go the wall.

But unlike listed banks, their ownership model makes it difficult for them to shore up their balance sheets as they are controlled by local politicians and can only issue non-voting shares with lots of strings attached.

About a third of the savings banks have already completed mergers and another third are immersed in talks.

The government has said that about another third of these small lenders need to merge to survive.

Analysts said the Bank of Spain will now be monitoring the merger process involving Caja Guadalajara and CajasSol.

"It's tempting to take a negative cross-read from the CajaSur intervention. But it has prompted other savings banks to reactivate merger talks over the weekend," the analyst said.

According to reports in the Spanish media yesterday , Basque bank BBK and Alicante-based Caja de Ahorros del Mediterraneo are hoping to present their merger plans this week.

Judy MacInnes is a writer with the Reuters news agency.