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Spanish banking sector may need further consolidation

Spanish banking sector may need further consolidation

(24 July 2015 – Spain) There are reports a new wave of consolidation in Spain’s banking industry may be on the cards as high costs and low returns make the smaller banks less feasible.

The number of banks in Spain has already been cut from 55 to 14 since the 2008 financial crisis, it is thought this number could be cut again to single digits.

According to the Bank of Spain, the country has the most branches per capita in Europe, with the sector still far oversized.

The banks that are the most likely targets in this process are below the top tier in Spain, where Santander and BBVA, the two largest, were able to ride out Spain's economic crisis partly because of the international spread of their businesses.

The biggest among the handful of banks now under threat is Banco Popular, senior banking sources said.

While Banco Popular is ranked sixth by domestic assets, it has been weighed down by low profitability and heavy exposure to property loans that turned sour during the crisis.

Before the financial crisis, which led to a €41.3 billion (A$61 billion) restructuring of Spain's banking industry, the volume of credit flowing from the banks to the economy was close to €2 trillion and the banks' average profitability, or return on equity, was 20 percent.

After the crisis, the volume of credit has shrunk by €500 billion and return on equity dropped to a third of what it was, well below the banks' cost of capital.

Banking experts predict the new wave of mergers will kick off in about a year, when banks will no longer be able to benefit from a fall in financing costs that result from the low interest rate environment.

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