A couple of years ago, it would have been unthinkable. A big Spanish bank now feels strong enough and confident enough to make a significant foreign acquisition.
The U.K.’s TSB Plc, spun off last year from Lloyds Banking Group (LYG) said Thursday it had received an offer of 340 pence a share, valuing it at around $2.5 billion, from Banco de Sabadell SA (BNDSY), Spain’s fourth-largest banking group.
It’s less than three years, of course, since the government of Spain had to ask for €100 billion ($106 billion) bailout from the Eurozone and the International Monetary Fund to recapitalize a banking system that had exploded after a real-estate boom as reckless and fraud-ridden as anything in the U.S. subprime market.
In the end, the government drew down barely €40 billion of that sum. Some effective resolution measures, generous tweaks to new rules on banking capital and, most importantly, a dramatic rebound in financial markets thanks to the European Central Bank all combined to avert the worst, and Spain is now the fastest-growing major economy in the Eurozone (even though loan books continue to shrink).
But the country’s banks had still been seen as one of the country’s weak spots until the ECB’s “Comprehensive Assessment” of Eurozone banks before it took over responsibility for supervising them last year. And this week, Sabadell’s larger rival, Santander SA (SAN) was told by the Federal Reserve its U.S. operations had “widespread and substantial weaknesses” in capital planning, even though they met basic capital adequacy standards.
Back home, Sabadell had passed the ECB’s stress test, in its own words, ‘with flying colors’, noting that it was the only bank in Spain whose asset valuations weren’t challenged.
But like many Spanish banks, its capital levels are higher than would be the case without a generous local rule regarding the tax treatment of unrealized losses, mainly on property loans.
And its profits in recent years have been handsomely padded by gains on an €18 billion portfolio of government bonds that accounts for over 10% of its total balance sheet. The profits on these are only increasing now that the ECB’s quantitative easing program is driving prices to all-time highs.
Sabadell’s core business–lending to Spanish homeowners and businesses–is still weak, even after the drastic surgery in 2012 and 2013. Spanish loan books are still shrinking.
The price Sabadell has offered was a chunky 29% above Wednesday’s close and is 20% more than any price the market has put on TSB since it floated last year. (Sabadell’s own shares fell 9.3%, with the market clearly thinking that it is overpaying.)
But the move makes plenty of strategic sense for Sabadell, which can diversify its business away from Spain and grow in one of Europe’s healthier economies. TSB, one of a handful of ‘challenger’ being openly encouraged by the authorities to dilute the influence of the U.K.’s “Big 4”, may benefit from having a stronger parent behind it (although the problems faced by its big Spanish rival Santander in the U.K. show there’s no guarantee of success). From a relatively low base, the bank is aiming to grow its loan book by 50% by 2019.
CORRECTION: An earlier version of this story incorrectly stated that the Fed found Santander’s U.S. operations to be under-capitalized. The article has now been amended.