Miguel Ángel Fernández Ordóñez, governor of the Bank of Spain, recently encouraged Spanish savings banks, which are financial institutions that have a social goal, to search for ways to start to go global. In addition, the strong earnings in the sector have encouraged these institutions to look for new markets where they can continue to grow. Last year was one of the best years for Spanish banking, generally speaking. During the first nine months of the year, pending announcement of the results for the entire year, Spanish banks earned €11.659 billion, or 41% more than during the same period in 2005. Savings banks in Spain have enjoyed similar growth. Their earnings grew by 33%, reaching €6.234 billion.


These sorts of strong results have been driven by the improvement in their intermediation margins, which represent the difference between the interest rates on loans they give out, and the interest rates that they pay to their depositors. This happened because interest rates have risen by 1.5% since December 2005, reaching 3.5%. Some analysts believe that rates will continue to rise, although in a moderate way, for this entire year. Others are more optimistic, expecting a rise of only a half percent to the 4% mark in 2007.


Going Abroad


Another important source of income for Spain’s banking sector is derived from foreign business. After setting up offices in Latin America, banks such as Santander and BBVA are now looking for new markets to invest in. BBVA Group, headed by Francisco Gonzalez, has already begun its expansion in Asia through Citic, a Chinese institution. In addition, the fact that it has expanded its capital by three billion euros suggests that its expansion abroad will not end in China. According to Juan Ignacio Sanz, a financial expert at the Esade business school, BBVA will consider making a possible acquisition in Europe that would balance the distribution of risk in its international business, which has been overwhelmingly in the Americas. Meanwhile, Santander, headed by Emilio Botín, will have to focus on the United States, where it currently owns 24.9% of the shares of Sovereign Bank.


Acquisitions that help achieve critical mass can also take place on a local level. Sabadell could merge with Bankinter, which has still not completed its merger with Banco Urquijo. Although Spanish banks have to compete with the big multinational financial institutions in overseas markets, savings banks are competitive in their own domestic market. Manuel Romera, director of the financial division at the Instituto de Empresa business school, notes that Spain is the only country in the world where the savings bank business model has been a success. Spain is the only country where this model does not have the same negative image as in the rest of Europe. Nevertheless, if these institutions want to go abroad, they will have to achieve a critical mass. One option is to merge with one another. However, the fact that each institution belongs to an autonomous group of companies means there is a potential conflict of political interests. Beyond those problems, there are legal obstacles to these kinds of deals, notes Juan Antonio Maroto, professor of financial economics and director of the department of finance at the Complutense University of Madrid (UCM).


Another alternative under consideration is to issue shares of ownership. However, Romera believes that this “is a bad deal” because those who buy such shares have no voting rights. Until now, Spanish savings banks have been financial institutions without any owners. Selling these sorts of shares would mean having an owner who has no right to make any decisions about the company. The only solution would be to convert such a company into a privately owned entity. However, such a move would radically change this sort of business model as well as the essential nature of Spanish savings banks, so this also is not a viable alternative. Savings banks such as la Caixa are thinking about creating a holding company whose shares are quoted on the stock exchange and which includes their portfolio of industrial holdings.


Both Maroto and Romera agree that savings institutions would face an enormous number of problems in their efforts to internationalize. They ask the following question: If, until now, these institutions have not thought about going abroad, why do they have to do that now? For one thing, notes Romera, they would need significant amounts of capital to do so. This means that they would have to reduce their holdings in other sectors that are very attractive for them, such as electric power, which is very much in vogue today. For example, E.On, a German company, has made a takeover offer for Endesa, a [Spanish] company in which [savings bank] Caja Madrid is one of the owners.


Expansion into Latin America


Analysts agree that Latin America is the key international destination for Spanish savings banks. According to Manuel Romera, these banks need to keep two fundamental factors in mind when evaluating a possible move overseas – entrepreneurial culture and size. Romera notes that “their business model has succeeded only in Spain, and it is not well regarded in the rest of the world.” In addition, these institutions lack experience in international operations because they have specialized so much in non-profit operations in Spain. Another factor that must be considered, says Romera, is “the segmentation of the savings banks themselves when it comes to size.” Whereas big institutions such as Caja Madrid and la Caixa have more of the skills needed for going abroad, the great majority of Spanish savings banks are small regional institutions. They have a high level of economic activity, but their infrastructure is poorly prepared for operating abroad.


When it comes to needed financing, Romera wonders which countries they can export their business model into. In his view, Latin America “has not been virgin territory” for some years, and it is a region that has been divided up by banks from Spain and the U.S., where the savings bank model does not play much of a role. The only alternative, notes Romera, would be to operate by appearing to be a commercial bank, or to buy a local institution. In addition, they would have to await the regulatory results of Basel II guidelines of the Basel Committee on Banking Supervision.


For his part, Juan Antonio Maroto has a less critical view. Maroto believes that “internationalization of the savings banks would be an interesting” idea in Latin America because their banking model somewhat resembles the model in Spanish savings banks, and their operational style is not totally unknown. In some countries, such as Peru, savings banks already exist. “In Latin America, there is a greater tradition [of savings institutions] than in other places,” such as Eastern Europe, where financial transactions have always been managed by state-owned banks. In addition, although the expansion of the European Union provides bureaucrats with some advantages, the appearance of German banks in Eastern European countries makes it hard for new competitors [from Spain and elsewhere] to enter [those countries], especially because their business model is so different and unfamiliar.


Maroto believes that “Latin American savings banks would be very well received in Latin America.” They have always achieved high levels of operational efficiency, he notes, which has given them a more positive image. One way they could justify their internationalization would be to accompany those Spanish corporations that have their own clients when those companies expand abroad. After all, Latin America is the chief destination of Spanish companies that go abroad because of such as cultural factors as a common language. Another important factor is the immigrant community in Spain, which comes largely from Latin America. This is an important reason why the savings banks can commit to setting up operations in South America, says Maroto. In his opinion, both commercial banks and savings banks have been worrying about breaking up the pseudo-monopoly of banks from the United States, which have been responsible for sending and managing capital remittances until now.


In recent months, banks such as Santander have made a very strong commitment to capturing the Latin American community in Spain, and offering them important advantages such as commission-free activity – i.e., the same benefits offered to other residents. This type of positive discrimination is one sign of the high level of business activity that immigrants provide for commercial banks and savings banks. The critical mass of immigrants coming from Eastern Europe is much smaller than the number coming from Latin America. The logical consequence would be for the savings banks to try to win over that Eastern European community by setting up operations in their countries of origin.


For Ana Fernández Laviada, professor of finance and accounting at the UCEIF Foundation at the University of Cantabria in Spain, Latin America is the natural market for Spanish savings banks to begin their globalization efforts. In addition, Fernández Laviada believes that their expansion could be a positive thing for the Latin American region. When it comes to serving the less affluent sectors of the population, this model “is not just suitable but also convenient, useful and necessary for any society, especially for less developed ones.” The concept of private, non-profit entities is not something trivial, she explains. “It is not the same thing to increase your dividends as it is to give low-interest loans, the way things were before 1977; nor [is it the same thing] to distribute dividends through social work as has always occurred. Through the course of their long life, savings banks have developed an intense concern for social activity, narrowly tied to the local area where they operate.”


Fernández Laviada does not give much importance to the fact that the region has a low rate of bank penetration because savings banks in Spain “have had a stature that meets the needs that led to their creation. They were founded in order to provide coverage to one town or one city with a greater or lesser population size; and they have grouped together over time, obtaining economies of scale through the Spanish Confederation of Savings Banks (CECA).


A Domestic Model with a Future


Nevertheless, both Maroto and Romera are skeptical about the need for Spanish savings banks to begin internationalizing their business model. Apart from legal problems, regulatory barriers and financial challenges, Maroto wonders whether going abroad is an opportunity or really a potential threat. In his opinion, “the domestic [business] model is not exhausted.” Like Maroto, many analysts believe that banking institutions cannot survive on a base of loans, especially when they expect a slowdown in loan activity. In his opinion, the model of the savings banks is more focused on communities, as well as small and midsize companies that require greater attention than big companies. That’s because it is easier “to give one loan of one billion [euros] than it is to give a thousand [different] loans that are worth a million [euros each],” he notes.


Fernández Laviada also believes that globalization involves clear risks. Only those savings banks that have sufficient economic resources and highly qualified professionals have the skills needed for going abroad. Nevertheless, Fernández stresses that the “savings banks know their business very well, and caution has always been their motto. Whenever someone forgets the basic ideas, a supervisor takes care of reminding him. It is the same activity [as in Spain], so there is no reason why internationalization of this sort should involve any collateral risk,” she notes.