BBVA-Sabadell merger plans aided by ECB’s policy of creating European champions

One of the largest financial groups in the world, Spain’s BBVA, is hoping that the European Central Bank (ECB) will take a favorable view of its ongoing attempt to buy Banco Sabadell, the fourth-largest Spanish banking group. The European regulator has been encouraging these kinds of consolidation processes as part of its goal of ensuring that Europe’s financial institutions remain solvent. “We do not comment on individual operations, but we do have a clear vision about consolidation,” official ECB sources said, alluding to earlier statements by the regulator about the importance of promoting the size of lenders in order to gain scale. If successful, the merged bank would be the tenth-largest in Europe by assets, which would exceed €1 trillion.

BBVA launched a hostile €12.23 billion ($13.1 billion) all-share takeover bid for Sabadell on Thursday, in a surprise move that triggered opposition from the government. Taking the offer directly to Sabadell shareholders comes after Sabadell’s board rejected a bid on the same terms on Monday, a position the board reiterated on Thursday.

This is the second attempt at a tie-up between BBVA and Sabadell. They called off merger talks in November 2020 after failing to agree on terms, including the price tag. The latest move comes as Spanish banks have been looking for ways to increase revenue as a boost from high rates begins to fade.

Carlos Torres Vila, executive chairman of BBVA, said he was confident about securing the approval of the ECB, which would provide backing for the bid. “In the first exchanges with the supervisors there was no obstacle from their point of view; they even have a favorable opinion about consolidation,” he said on Thursday. “The ECB likes consolidation and would love to see cross-border consolidation. That does not apply to this transaction, but their opinion is on the favorable side, and they have been kept informed throughout.”

The ECB’s main mission is to ensure the financial stability of the European Union. With this in mind, it seeks to ensure that entities have high levels of solvency to withstand a crisis. Financial sources explain that the aim is to create European champions that are too big to fail during unfavorable economic cycles. The regulators themselves have publicly expressed their desire for cross-border mergers between banks from different countries, with the aim of creating truly European institutions that can compete with the largest global banks.

The new entity’s solvency level would be high, above the bank’s own 12% objective. The forecast is that the operation will consume just 30 basis points of capital (about €1.45 billion, while BBVA currently has excess capital of €3.1 billion). “We have to be absolutely prudent, at the present moment we do not know if the operation will materialize, it all depends on the shareholders. But the ECB has to authorize it and always does so based on the principle of solvency and the prudential principle. What we are looking for is the stability of the financial system in the euro zone, and Spain is an important country,” said ECB Vice-President Luis de Guindos, a former economy minister of Spain.

Close scrutiny

Besides approval by the ECB, BBVA must also secure permission from the Bank of Spain, the National Securities Market Commission (CNMV), the Ministry of Economy and the National Commission of Markets and Competition (CNMC). Spanish authorities are focusing on the implications that the operation would entail in terms of reducing banking competition. “It is a good time to pay attention to what the optimal level of concentration should be. I don’t have an answer today, but I think it is important to analyze it,” said Bank of Spain Governor Pablo Hernández de Cos on Tuesday, addressing lawmakers inside the Congress of Deputies.

According to BBVA’s calculations, the merged entity would have a 22% market share in loans. The top three banks in the Spanish market would account for more than 70% of that line of business. And that is where the Spanish government and financial authorities are taking the closest look. “The operation introduces potential harmful effects on the Spanish financial system. It would mean an increase in the level of concentration that could have a negative impact on employment and the provision of financial services,” said an official source at the Ministry of Economy.

BBVA has an ace up its sleeve. Although the resulting entity would significantly gain market share, it would not be the leading bank in the Spanish market. That title has been held by CaixaBank since it absorbed Bankia. And the entity led by Carlos Torres feels that if authorities agreed to that merger four years ago, creating a dominant entity in all lines of business with market shares in excess of 20% and 25%, they should not hinder the creation of an institution that would remain in second position in the market. “We have had legal advisors who have analyzed precedents and the CNMC’s criteria. From all this analysis, the conclusion is that with the resulting concentration we would reach moderate quotas, lower in almost all areas than CaixaBank,” said Torres.

BBVA also notes that banking competition in Spain is broader than the number of branch offices across the country, since in general terms all entities allow customers to create online accounts and to hire their products and services through mobile apps and websites. In recent years digital banks, foreign lenders and fintech have added to traditional banks’ offers.

“The market is characterized by digital competition. Last year, more than half of the clients who opened their accounts at BBVA did so through digital channels. And it is the same trend at other banks. There is a different type of competition and these factors will be taken into account by the CNMC. Everything indicates that the operation should not face a major problem,” Torres insisted.

Spanish banking has gone through several waves of consolidation, with the number of lenders down to 10 from 55 before the 2008 financial crisis. In the last few years, three global funds —BlackRock, Vanguard and Norges Bank— have acquired privileged packages of shares in listed Spanish entities worth €17.5 billion, representing 12.3% of the combined capitalization of the banking sector.

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