Spanish bank BBVA in merger talks with smaller rival Sabadell

Spain’s second-biggest bank BBVA is in merger talks with its smaller domestic rival Sabadell as consolidation in the Spanish banking sector steps up a gear.

BBVA confirmed the talks with Sabadell, which owns TSB in the UK, on the same day that it announced it was selling its US operations to PNC in an all-cash deal for $11.6bn. Sabadell has a market capitalisation of €3.3bn compared with BBVA’s €24.5bn.

Spain and Italy are currently Europe’s most active markets for banking M&A, with the economic fallout from the pandemic increasing longstanding pressure on the country’s lenders to consolidate. In September, CaixaBank agreed to buy Bankia in a deal that would create Spain’s biggest lender. Meanwhile, Santander announced last week that it plans to close almost a third of its branches in Spain.

BBVA said it was in board-approved discussions with Sabadell, “in relation to a possible merger”, adding that due diligence had begun and advisers had been appointed. But it stressed that no final decision had been taken over whether a merger would ultimately take place or what its terms and conditions would be. 

Sabadell’s shares rose almost 25 per cent after the news but have more than halved over the past year. It has repeatedly expressed interest in a merger with another Spanish bank and has also previously indicated it would be willing to sell TSB, which it bought for £1.7bn in 2015.

BBVA’s shares rose 15 per cent on Monday after its announcement of the sale of its US operations to PNC at almost 20 times their 2019 earnings. 

A purchase of Spanish assets would be at a significantly lower multiple, given the problems of the European banking industry and the country’s economy, which is among the worst affected in Europe by the pandemic.

A BBVA-Sabadell merger is likely to lead to branch closures to cut costs. Although Spanish banks overall have halved their number of branches over the past decade, the country still has about 50 branches per 100,000 of population — one of the highest levels in the EU. This compares with around 39 in Italy, 34 in France and three in Finland.


Market capitalisation of Sabadell, while BBVA’s is €24.5bn

Spanish banks have moved more services online in response to the pandemic, one of the big factors in Santander’s announcement last week that it will close up to 1,000 of its 3,100 branches in the country.

Pablo Hernández de Cos, the governor of the Bank of Spain, has called on the country’s lenders to consolidate as a response to both the “low profitability of the banking business” and the “credit, market and operational risks” posed by the pandemic.

“It is fundamental that institutions make deeper efficiency gains, reduce costs and use new technologies more intensively,” he said last month. “The consolidation of the sector could be a useful tool to achieve this objective.”

Consolidation may also make Spain’s banks better capitalised — at the moment, their capital ratios are among the lowest in the Eurozone. A transparency exercise carried out by the European banking agency in June found that, as of the end of 2019, the big eurozone lenders with the lowest tier one capital ratios were all Spanish — Santander, Sabadell, BBVA and CaixaBank.

BBVA says its tier one capital ratio will increase by almost 300 basis points on completion of the sale of its US operations to PNC. A higher level of capital would also benefit Sabadell if the merger talks succeed. Similarly, CaixaBank could benefit from Bankia’s higher levels of capitalisation if the merger between the two is completed.

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