Standard and Poor’s downgraded Caja Mediterraneo (CAM) and Bancaja from A- to BBB+ last Friday, in a move that was subsequently followed by CAM and Bancaja’s petition that the Rating Agency withdrew their ratings. Standards and Poor’s argued that CAM and Bancaja are more vulnerable than their peers to the economic slowdown already latent in the Spanish economy, that will become more severe in the remaining of 2008 and 2009.
A credit rating determines the creditworthiness of a borrower, or otherwise stated its repayment strength. Credit ratings are categorized into investment-grade and below-investment grade, to denote in rough terms what issuers are investment worthy and what issuers are not. With Standard and Poor’s downgrade decision, CAM and Bancaja still maintain their investment grade status, which is held for ratings BBB- and above. Prior to undergo Standard & Poor’s downgraded, CAM and Bancaja were downgraded by Moody’s in August of 2008 from A2 to A1.
The Spanish savings banks continue to suffer in the current economic environment. Consolidation is likely to happen between intra-region savings banks as economic conditions deteriorate. As of year-end 2007 there were a total of 46 savings banks, down from 47 a year earlier. The top ten savings banks are La Caixa, Caja Madrid, Bancaja, CAM, Caixa Catalunya, Caixa Galicia, Caja de Ahorros de Zaragoza, Unicaja, BBK and Caja Espana. Savings banks in Spain surpassed commercial banks in market share in 2007, with a 45.9% of total lending and 49.9% of deposits. Commercial banks Santander and BBVA seemed to be performing better in the Spanish mortgage space, where savings banks are more exposed to increasing delinquencies.
The downgrade of CAM and Bancaja, based in Alicante and Valencia (southeast of Spain) is relevant and concerning. Bancaja is Spain’s third largest savings bank, with total assets of EUR 102.1 billion as of end-March 2008 and a market share of 8.26% in Spain’s financial system. CAM had total assets of EUR 69.8 billion as of end-March 2008 and a market share of 5.65%. The deterioration of their financial strength is a signal that consolidation may soon occur.
The most recently announced consolidation between two savings banks could happen in Extremadura, a region southwest of Madrid. Extremadura, long ruled by the Socialist Party under President Juan Carlos Rodriguez Ibarra from 1983 to 2007, is Spain’s poorest region in per-capita income terms. The consolidation would involve the savings banks of its two provinced Badajoz and Caceres. The move might help the regional savings bank become more competitive in nearby regions like Andalusia. The two savings banks of Extremadura would be Caja de Extremadura an Caja Badajoz.
This Wednesday, Cinco Dias, the Spanish financial newspaper, interviewed Extremadura’s Finance Minister Angel Franco Rubio. Franco Rubio suggested that nobody at the Junta de Extremadura, Extremadura’s government, had opposed the merger. He argues that generally speaking every stakeholder involved would support the merger, including the trade unions, the CECA (confederation of savings banks), and the savings banks’ employees.