CajaSur Seizure Marks Change for Spain’s Ailing Banks
(Update1)
By Charles Penty
May 24 (Bloomberg) -- As a Roman Catholic priest, Santiago Gomez Sierra began his last board meeting as chairman of the failed Spanish savings bank CajaSur three days ago by saying a prayer. Some of the directors crossed themselves.
Within hours, the Bank of Spain stripped Gomez of his powers and threw out managers at the ailing 146-year-old lender, controlled by the Catholic Church in the southern city of Cordoba, citing “viability problems.” CajaSur lost 596 million euros ($748 million) on 426 million euros in revenue last year.
The Bank of Spain is stepping up efforts to shut down or buttress the weakest of Spain’s “cajas,” mutually owned banks that boosted lending more than fivefold during Spain’s economic boom and account for about half the country’s loans. The seizure is the first under a state-financed rescue plan that Standard & Poor’s estimates may cost as much as 35 billion euros, increasing the burden on Spain’s finances as the government tries to reduce its budget deficit.
“If it shows the Bank of Spain is prepared to take action to root out problems at the savings banks, you could say it’s a good thing,” said Alvaro Cuervo, a business professor at Madrid’s Complutense University and author of a study of Spain’s banking crisis from 1977-1985, when 29 lenders were seized. “You can’t keep postponing solutions if the model is broken.”
Accountability Criticism
Savings banks, which have no shareholders and traditionally distribute a portion of profit to social programs, have been criticized by analysts for lacking accountability. The Socialist-led government and main opposition party support changing laws to let cajas sell shares with voting rights to improve their capital and governance.
Finance Minister Elena Salgado today said more savings banks would merge in the coming weeks. She urged regional governments, which appoint directors to many cajas’ boards, to not delay transactions for political reasons.
“All the regional governments should be aware that decisions have to be made quickly,” Salgado said in an interview with Cadena Ser radio. The Bank of Spain’s move was a sign of “firmness, control and solvency,” she said.
As loan defaults rose and the property market collapsed, weakened savings banks were given until June 30 to apply for support from the government rescue fund, under terms authorized by the European Commission. The fund can hold as much as 99 billion euros, most of which hasn’t been raised.
16 Merger Candidates
At present at least 16 savings banks are engaged in talks or have already sealed plans to merge, according to the Spanish savings bank association. Savings banks have granted 243 billion euros of the 454 billion euros in outstanding loans for real estate activity or construction, according to the Bank of Spain.
Financing bank rescues may cost Spain’s government as it seeks to reduce a budget deficit that it forecast at 9.3 percent of gross domestic product this year, equal to the shortfall projected for Greece by the European Commission. Concern Greece’s budget woes will spread to countries such as Portugal and Spain prompted the European Union and International Monetary Fund to pledge almost $1 trillion earlier this month to backstop the debt of member nations.
The cost of bailing out Spain’s savings banks “certainly represents an additional pressure,” said Maria Jose Mori, an analyst at Moody’s Investors Service in Madrid. Moody’s includes costs of the rescue fund in its overall view of Spain’s creditworthiness, she said.
Failed Unicaja Merger
For CajaSur, with 486 branches and assets of 19 billion euros, time ran out on the evening of May 21 when its board refused to combine with Unicaja, a bigger and profitable savings bank in Malaga, ending talks that began in July last year.
Within hours the central bank, in an e-mail, published its decision to evict management and pass control to the government rescue fund.
The Church in Cordoba defended the bank’s management and said in a statement that a merger wasn’t possible because there was no accord on labor terms.
”The people that have been at the helm of CajaSur are fully competent,” Bishop of Cordoba Demetrio Fernandez said in a statement on the Dioceses’ Web site. “It is precisely this personal and professional honor with which they have always acted that has led them to ask for the intervention of the Bank of Spain.”
A spokesman for CajaSur said the lender had no comment on criticisms of management.
CajaSur represents 0.6 percent of Spanish banking industry assets and depositors and creditors can be “totally calm” as the lender will function normally under the oversight of the government fund, the Bank of Spain said in the statement.
Swaps on Banks
Even so, the news on CajaSur may provide ammunition for investors who say the problems of the savings banks run deeper than they appear, said Alberto Espelosin, who helps manage about $12 billion at Ibercaja Gestion in Zaragoza, Spain.
Credit default swaps, a type of type of insurance against debt default, rose to 650.9 basis points on May 21 for Caja de Ahorros del Mediterraneo, a Spanish savings bank about four times larger than CajaSur by assets. By comparison swaps for Banco Santander SA, Spain’s biggest commercial bank, traded at 188.7.
“There are foreign investors who are negative on Spain for whatever reason, but this is a relatively small bank,” Espelosin said. “I prefer to see it as something positive because it’s the start of a process of restructuring of the banking industry which is very necessary.”
Loans to Developers
Under a 1977 Royal Decree, an array of groups, including local politicians and customers, have oversight over the cajas. That arrangement led many to become inefficient and lend excessively to developers through Spain’s decade-long property boom, said Jordi Fabregat, a finance professor at Esade, a business school in Barcelona.
Snowballing property-related defaults at CajaSur mirror problems facing some of Spain’s 45 savings banks, said Rui Pereira, an analyst at Fitch Ratings in Madrid. CajaSur’s assets shrank 5.5 percent last year and its solvency ratio was below required levels, according to its financial statements and an auditor’s report.
In 2008, lending to real estate made up about 30 percent of CajaSur’s total loans, according to its annual report for that year. Bad loans as a proportion of total loans exceed 7.9 percent, said Andres Hens, a CajaSur director representing the United Left political group, who recounted the history and the final board meeting in a telephone interview.
Unions Blocked
“Especially at the start of the real estate boom, we amassed a lot of risk,” said Hens. “You have to remember that Cordoba doesn’t have what you might call a diversified industrial sector, so there weren’t many ways for CajaSur to spread its lending bets.”
Unions failed to agree on job cuts resulting from the proposed merger with Unicaja, Hens said.
The bickering “really shows the highly political nature of these institutions,” with the additional factor of CajaSur’s relationship with the church, said Fitch’s Pereira.
The takeover will be felt in its home city of Cordoba, known for its Christian Cathedral built in the former Great Mosque, said Hens. As part of its social spending, CajaSur pr