Left-wing coalition sends jitters through Spanish banking

Podemos’s Pablo Iglesias embraces PSOE’s Pedro Sánchez after signing the coalition agreement

Banks in Spain are bracing themselves for yet another big blow to their profits, thanks to the anti-establishment Podemos party’s moves towards forming a coalition with the centre-left socialists after Spain’s indecisive November election.

Podemos and its bank-bashing leader Pablo Iglesias have advocated higher corporate taxes, especially on banks, as well as a new financial transactions tax.

Podemos rose to prominence after the eurozone crisis on the back of popular anger against the Spanish establishment, especially banks. This is by far the closet Iglesias has come to government.

His proposals reflect the popular view that banks need to pay back the fiscal aid they received in the crisis, through bailouts, inducements for stronger banks to take over failing institutions and deferred tax assets booked on losses.

One source of hope for the banks is that that socialist party PSOE will retain the upper hand in the coalition, with its leader Pedro Sánchez likely to remain prime minister, and possibly insisting his party keeps the key economic posts.

That could curb the more radical parts of Podemos’s programme. The coalition, in any case, will still need to get the support of smaller and less economically radical parties.

Supreme Court

However, during campaigning, Sánchez also advocated a tougher bank-tax regime. He already changed the law last year to in effect nullify a Supreme Court decision, after it sided with the banks in a highly public legal battle over whether lenders or borrowers should pay a tax on officially registering mortgages.

One chief financial officer of a large Spanish bank says the response to new bank taxes will be the same as it was after the Supreme Court case: to increase prices for consumers as much as possible, tighten underwriting and push even harder on efficiency.

The suggestion is that it will be harder and more expensive to borrow and will lead to more job losses.

Spanish bank stocks have already underperformed their European peers this year, as ever-looser monetary policy has had an unusually rapid impact on Spanish banking revenues, because of the prevalence of tracker mortgages in the country.

This is especially worrying for banks whose business is predominantly in Spain, which is the case for all of them except BBVA and Santander.

The two big banks have diversification, but for the rest of the sector they will have even more miserable valuations 

 – Financial institutions investment banker

One-off taxes, fines and other levies against banks are by no means unique to Spain, notes the chief executive of a large Spanish lender.

However, Spain’s faster economic growth, and especially the opportunity to grow in small and medium-sized enterprise (SME) banking, has been a saving grace for the sector, even while the mortgage market has deleveraged and become less profitable over the past five years.

“A lot will depend on the level of confidence among investors and SMEs,” says the CEO.

Bankers consequently say they are most concerned about what will happen to the domestic economy, given the risks to growth of higher taxes and spending. High-net-worth individuals, as well as banks and other big businesses, are most likely to face higher taxes.

Sánchez, on the other hand, has pledged not to increase taxes on the low and middle classes, and to ease the tax burden on SMEs.

Bankia

Podemos’s other idea that antagonizes the banks is its opposition to any further sell-downs of the government’s 70% stake in the fourth-largest lender, Bankia: an institution created in 2010 from seven failing savings banks, listed in 2011, and then was bailed out at the height of the eurozone crisis in 2012.

The party also wants to sack José Ignacio Goirigolzarri, Bankia’s market-friendly chairman.

Goirigolzarri and his chief executive José Sevilla Álvarez won over private investors earlier this decade, cutting more than a third of Bankia’s branches and workforce.

Since then, however, negative rates have taken an especially heavy toll on Bankia, which is much more reliant on net interest income in the mortgage market than other big Spanish banks, including third-largest lender CaixaBank.

Even without new taxes, Bankia’s return on equity is likely to fall from around 6% last year to 3% in the early 2020s, according to analysts at UBS.

While Podemos is not a Eurosceptic party, bankers hope the EU’s state-aid authority will prevent too much government control over Bankia’s strategy and policies. The government is supposed to be exiting Bankia by 2021, to fulfil the EU’s conditions for its bailout.

However, given its 14% share of the Spanish mortgage market, more generous lending policies and prices at Bankia could impact the market, especially if its share grew more rapidly.

Meanwhile, if the new government succeeds in imposing higher taxes on banks, and if it meddles more in Bankia, it will make it even harder to sell the bank, at least at a good price. Bankia’s share price had already fallen by more than a third during the past year before news of the potential coalition.

After Iglesias and Sánchez joined forces, the stock immediately fell by another 10%.

An acquisition of Bankia by another bank, rather than just a sell-down in the market, is much less likely to happen now because of the political and rates environment.

A strategic sale could have given the government a control premium, and boosted the sector’s profitability, by making it more oligopolistic, if the acquirer was another big or mid-tier domestic bank, such as Banco Sabadell.

Spain’s leading banks may now be less keen on investing at home through big M&A deals, as rates and politics have dragged down the market’s prospects, also making it harder for them to raise capital for acquisitions.

“The two big banks have diversification, but for the rest of the sector they will have even more miserable valuations,” says one financial institutions investment banker covering Spain.

“For Bankia, it’s really bad news. The risk is that the government stays in the institution for too long and damages the bank.”