I know you guys don’t give a s*** about the Unicaja + Liberbank potential merger (that’s two mid-size spanish banks in case you want to ask), but let me try to explain why you’re wrong and why it’s actually extremely important. Thread.
I think we can all agree one of the major effects and economic distress created by the financial crisis was the massive bank deleveraging. This was triggered by large losses but also by massively increased capital requirements (x3 more or less).
New capital raises did offset that a bit, but not enough – because raising even more capital was too painful for shareholders. The dilution is just too large.
We can also all agree that negative rates are bad for banks (well, all except the ECB – until very recently, but that’s another story!) and that if they are to contribute to economic growth, banks need to be more profitable to improve their capital.
Unfortunately, this is harder to do than to say: IT investments take a long time to pay off, restructurings are expensive and equity isn’t cheap, NPL coverage requirements keep creeping up, rates are not going up, litigation is still there, etc.
So everybody knows (and the ECB has been crystal clear about this recently) that M&A needs to happen, there needs to be less competition in the banking market and the same cost base needs to deliver more turnover. Technically it's possible.
So to put it bluntly: the EU’s economy needs more bank M&A. The days are long gone when supervisors were screaming about banks being too large to manage from a systemic point of view.
There are many reasons why M&A hasn’t been happening a lot: the incompleteness of the banking union is one, but that’s not enough. This does not apply to intra-border M&A – such as Unicaja + Liberbank!
A less often discussed constraint and barrier to M&A has been the position of the supervisor; a slightly schizophrenic one! Under Mrs Nouy’s stewardship, every big M&A project came with a required capital increase!
Banks were often puzzled by this, e.g. Italian banks would ask: “if the two banks have adequate NPL coverage, why do they need a bigger coverage once they combine and are more efficient?” Honestly a very good question.
And most of the time, the reason was basically this: “I’m asking you to raise capital, because I can. You’re asking something from me (authorization for the merger), I’m asking something from you (more capital.)” That's it.
Obviously, this complicates deal making and even made some M&A projects economically meaningless.
So coming back to Unicaja + Liberbank. Since Mr. Enria took over, it seems the SSM has slightly changed its approach. Various speeches seem to imply that the SSM would not adopt the same kind of strategy before approving mergers.
And if that’s true – if the SSM stops asking for more equity each time there’s a major M&A deal – honestly, it’s a game changer. And guess what: reportedly, the SSM seems to be on board for a Unicaja + Liberbank deal with no additional equity.
And we’re not talking about a Rabobank + ABN Amro deal here. Liberbank is rated Ba2/BB+ whereas Unicaja is BBB-/Baa3. Both banks still have quite a nice stack of legacy NPA assets, included a large chunk of foreclosed real estate.
So honestly, if this merger doesn’t come with mooooar CET1, which one will?
Bottom line: even if you’re not interested in banking, keep an eye on this deal and look for the conditions requested by the SSM to approve the deal. That’s what matters.
