Spanish savings bank sector set to undergo restructuring

The Spanish savings bank sector has been significantly weakened by the severe crisis in the country's real estate market and the overall weaker operating environment. In this context, there is an increased impetus to restructure the sector by means of mergers or other forms of integrations between institutions — a process that in general is likely to prove positive for the intrinsic financial health of savings banks, Moody's Investors Service said in a new Special Comment.
So far, 24 of Spain's 45 savings banks, accounting for close to EUR 350 bln in total assets, have publicly announced consolidation intentions, and many others are maintaining contacts in this direction at different levels.
"The Spanish government's creation of the Fund for Orderly Bank Restructuring ("FROB" in its Spanish initials) in June 2009 has been a particular driving force of such consolidation. The fund's declared purpose is not only to support the Spanish financial system, but also to foster its restructuring by means of sector consolidation. In our opinion, both FROB assistance and such integration processes will be crucial for the long-term financial health of this sector," said Alberto Postigo, a Moody's Senior Analyst and author of the report.
The Moody's report explains that Spain's savings banks are pursuing consolidation in two different ways: a traditional merger or an alternative option known as an Institutional Protection Scheme (SIP). Although both options are eligible to receive support from the FROB, the rating agency has some concerns with regard to integration processes through SIPs, as their success lies chiefly in some of the governance details as well as the execution of agreed plans, and so far no SIP has been established in Spain.
In general, Moody's said it would expect to assess the rating impact of such a consolidation only once the General Assembly of each savings bank affected has approved the operation. In previous such discussions, the consolidation process has proved irreversible only after successful completion of this phase of authorisation.
"Moody's remains moderately positive about the likely impact of the consolidation process on the intrinsic financial strength of savings banks, although the extent of such improvement will depend on the actual benefits that result from integration" Postigo explained.
However, this positive effect is unlikely to translate into improvements in senior debt and deposit ratings, as the expectation of extraordinary systemic support that Moody's currently incorporates into such ratings is anticipated to return to more moderate levels as the financial position of the consolidated entities improves. Pressure on debt and deposit ratings could even be downwards if the withdrawal of such extraordinary support is not accompanied by a sufficient improvement in the institutions' intrinsic financial health.