Stress tests open up Spanish bank opportunities

Gail Mwamba
12 August 2010

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Recent banks stress tests have revealed private equity investment opportunities in Spain, with some of the countryтs largest banks seemingly ripe for picking.

Market fears eased last month as it was revealed that less than 10% of the 91 European banks tested for competency to survive a double dip recession had failed to make the mark. However, the tests revealed a significant shortfall in capital in the Spanish banking sector, as five of the seven banks that failed were Spanish cajas. According to the regulators, the five cajas - Banca Civica, Diada, Espiga, Unnim and Cajasur - will have to raise about €2bn in new capital.

The bulk of the deficit is carried by recently founded Diadia which requires €1.03bn in new funding. Created in July this year, Diadia is a fusion of Caixa Catalunya, Caixa Tarragona and Caixa Manresa. The bank is understood to be the fourth largest savings bank in Spain, ranked by its consolidated assets of over €80bn. Of the banks that failed the tests, Banca Civica comes next in terms of capital shortfall at €406m, while Espiga, UNNIM and Cajasur need €208m, €270m and €127m, respectively.

The capital gaps therefore create an opportunity for cash-rich equity investors to take stakes in the banks. Recent changes to regulations in Spain, allowing banks to sell shares with voting rights, mean investors now have greater flexibility in setting up new capital structures.

Private equity investors have already got their foot in the door, with JC Flowers backing Banca Civica with a €450m convertible bond placement in July. JC Flowers is understood to have opted for the bond investment because of speed of execution, with the bonds convertible in two years.

Private investors may also be encouraged to pour money into the sector by official assurances, with the Spanish government embarking on plans to restructure its regional savings sector with a €12bn package, of which €3bn has already been used. The country's government has also unveiled plans to reduce the number of savings banks from 45 to about 20, which would offer investors opportunities for growth through acquisition.

Today's Spanish financial sector seems wide open to investment. However, it remains to be seen how much participation will be seen from private investors, as analysts continue to express fears over the country's debt levels and growth prospects.