Just last year, alarm bells began ringing loud and clear in Spain when the Bank of Spain rushed to rescue Caja Castilla la Mancha. Admitting that the savings bank had serious liquidity problems, the Bank of Spain took the unusual step of intervening with a €9 billion bailout. It marked the beginning of what has been a turbulent period for Spain’s traditional savings banks, known as cajas de ahorro.
Ask a Spaniard where he would like to obtain his housing loan from, and chances are that he/she would point to a caja. Among Spain’s oldest banking institutions, these cajas function as savings banks, which are non-profit organizations expected to reinvest their profits back into cultural or educational activities. Recently though, their fortunes have declined even as bigger banks like Banco Santander (STD) and Banco Bilbao Vizcaya Argentaria (BBVA) have flourished using the credit crisis to strengthen their position both domestically and internationally.
Small cajas are feeling the heat especially now as the Spanish property market creaks and threatens to collapse. During the economic boom at the beginning of this century, most cajas rushed to offer competitive loans to eager buyers. Now, as Spain struggles to recover from the economic battering of the past two years, it is the cajas who find themselves with the banker’s ultimate nightmare: bad loans and delinquency. In fact, the Spanish Confederation of Savings Banks estimates that around 7% of loans could turn sour this year compared to 5.1% the year before. The root of the cajas’ problem lies in the Spanish economy, which has been one of the worst performing in the Euro-zone. The economy contracted 0.1% in the last quarter of 2009, and the country has remained mired in a severe slump for seven consecutive quarters. A return to growth is expected only in 2011, according to the International Monetary Fund.
Record high unemployment rates have also fueled the fire of economic despair. Investors have been so disillusioned by the economy and indeed the banking sector’s prospects in Spain that shares of STD and BBVA are down 17.8% and 27.1% respectively on a year-to-date basis taken from close of trade on March 2. What has also made the cajas especially vulnerable is their close connection to regional political parties or politicians. As such, cajas often backed projects that more watchful commercial banks turned down. It also explains why they are destined to be riddled with more bad loans than the bigger players.
Is there a way out of this mire? Cajas like Barcelona-based La Caixa and Caja Madrid, the largest savings banks, weathered the crisis through the sheer size of their operations and have not suffered as much as the other 40-odd cajas. That leaves the smaller cajas contemplating the possibility of a merger with traditional rivals. And perhaps that is how cajas may eventually survive – mergers, expansions and diversification.
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