Many citizens are concerned at the wave of announced bank mergers. Some of the media warn about a risk of lack of competition and a possible danger of increased fees and rates. However, are those concerns justified?
Reality tells us no. The process of bank mergers that we are experiencing throughout Europe responds to three factors:
1) The need for strengthen the business model and balance sheet in the face of a scenario of negative real interest rates that will probably last a long time.
2) The business logic given the risk of an increase in difficult-to-collect loans that require strong and solvent banks.
3) The evidence of a sector that was oversized already before this crisis.
History has shown us that the concentration of the sector has had at the same time a defensive character and logical rearrangement. Between 2009 and 2019 the number of banks in Spain has dropped from 55 to less than ten. However, in that period, mortgage rates, credit conditions and commissions have not increased. In fact, they have gone down. Mergers do not reduce competition in a sector as regulated as banking, because it is not only the number of national entities that matters, but the evidence that Today a Spanish citizen can go to the banking services of national and international entities, alternative financing companies, fintechs and even non-banking entities who have entered the activity of lending, investing and financing. There are fewer national entities, but a much more diversified offer and, with it, more competition.
Mergers not only have business logic due to business complementarity, need to gain financial muscle to face a world of low interest rates and financial repression implemented by central banks, but it is also a consequence of the fact that many have realized that the size of the Spanish market is not and will not be as large and profitable as some estimated in 2005-2007.
The bank is realizing that the Spanish market is limited by demographics and business size. Spain is a country with an important change in the population pyramid that makes the demand for savings products different from that of a young and growing population. Spain is also a country of very small companies, including the misnamed ‘big companies’, compared to other European economies.
If in 2005-2007 the banking sector estimated double-digit business volume growth and returns on tangible assets well above their cost of capital, the reality of the European Union and Spain has discarded those optimistic expectations. We face years of negative rates, excess liquidity and a Eurozone where the business size is small and almost 20% of the population will be over 60 years old within a few years. A banking business with very low margins, low profitability on tangible assets and where there is still a percentage of difficult-to-collect loans that triples that of North American banks, for example.
The banking system is not shrinking, it is simply adjusting to the actual size of the market after the mirage of eternal growth that occurred before the crisis of 2008.
It is important to remember that having more robust entities capable of surviving difficult environments is key to recovery. In the 2008 crisis, many mistakenly blamed the banks for all the ills, when the financial sector is simply a symptom of a larger structural problem, not the cause. In 2020, no one can deny that the mergers have had a positive effect. Having stronger entities, with a more solid balance sheet and greater capacity to face a crisis has allowed credit continues to flow and banks have done admirable work in a period of enormous difficulty For your customers. This crisis shows us that having dozens of weak entities neither improves competition nor access to credit.
In 2020, with less than a fifth of entities that in 2008, companies and families have received services and credit in more affordable and advantageous conditions without a credit crunch having been generated.
The scenario for the next few years is going to be very similar to the current one. Low interest rates and low margins intermediation. That is why more mergers and better prepared entities will be needed to deal with economic cycles, which are becoming more frequent, although less severe than forty years ago.
In this context, the decision to Sabadell and BBVA Failure to proceed with its merger is not good news, and it is desirable that the negotiation has not been broken by own valuation estimates far from logic. It is essential that the Spanish and European banking landscape continue with bank mergers or we will find ourselves in a few years with a solvency problem amidst a sea of liquidity, a mistake that was made in Japan and that the European Central Bank has already stressed, since it will continue to maintain its policy of financial repression, very low interest rates and high liquidity, even if inflation picks up.
The great challenges of these mergers that we are experiencing are very similar to those of the past: Improve profitability in a world of negative real rates and reducing risk in a Europe that requires banks to blow and sip at the same time, lend a lot and cheaply while strengthening your balance sheet. This difficult task cannot be met with a large number of entities, as it does not respond to the size of the European market or to expectations of margins and returns on assets.
Mergers are welcome as long as they have business logic and, above all, they are remove political pressures who seek to maintain the erroneous concept of «local champions». In an increasingly interconnected, competitive world with increasing central bank intervention, it is essential that banks adapt, be they stronger and better prepared for change technological, digitization and internationalization.
Do not worry, competence and service are assured. What we should do is celebrate that banks recognize the real economic situation and adapt.
Daniel Lacalle. President of the Advisory Council of the Observatory on Financial Reality.