Spanish bank stocks gained in the wake of the European Central Banks' arranged rescue of Banco Popular Espanol SA (BPESF) by Banco Santander SA (SAN) Wednesday as investors bet that a consolidation could ease competition and improve sector profitability.
Santander will buy Popular for only €1, but will need to raise around €7 billion ($7.88 billion) in fresh capital to steady the group's combined balance sheets. The takeover of Spain's fourth largest lender could ease competitive pressures, particularly given pressures on net interest income generation.
Slow revenue growth has been the number-one theme among Spanish lenders since the sector was rescued in 2012 by a €41 billion injection from taxpayers, however, the impact of the deal is less clear as the sudden and merciless move by European regulators could pose a risk to other capital constrained banks across the continent.
Around the region, the Stoxx Europe 600 Banks index, the broadest sector benchmark, was up by 1.15% during early trading and quoted at 181.58 by 09:45 BST.
In Madrid, Bankia (BNKXF) stock rose by more than 5% to change hands at €4.32, extending its year to date gain to more than 8%.
As Spain's third largest lender before today, Bankia could benefit substantially from a lessening of competition on loan pricing, although it is likely that the morning's bid for the stock is partly the result of Bankia not having been the buyer of Popular.
BBVA (BBVA) , the country's second largest lender after Santander, gained almost 3% during the morning part of the session, despite a substantial portion of its earnings being drawn from outside of Spain.
It said in April that net interest income fell by 1% in the domestic market during the first quarter of the year, although it still beat consensus estimates thanks to its Latin American businesses.
CaixaBank (CIXPF) stock rose by 2.6% during the opening hours of trading, to change hands at €4.19, although the marriage of Santander and Popular could have less positive connotations for the lender over the medium term.
It is facing pressure from European authorities to reduce its exposure to Angola, which threatens its bottom line, given that the African country accounts for 40% of profits at Caixa.
The bank has been attempting to grow in Spanish SME lending during recent times in order to offset falling exposure to Africa. However, Banco Popular has a leading position in the SME space and this has now passed to Santander, which might make it more difficult for Caixa to compete.
Santander said it would raise around €7 billion in new capital as part of the rescue process "which will cover the capital and the provisions required to reinforce the balance sheet of Banco Popular," the bank said in a statement. "The current shareholders of Banco Santander will have preferential subscription rights in the share capital increase. Banco Santander holds underwriting commitments for the total of such amount."
"After these transactions, it is expected that the impact on the CET1 capital of the Banco Santander Group will be neutral," the bank said, adding it expects it to generate a return on investment of between 13% and 14% in 2020 and to be earnings accretive by 2019.
Santander stock fell by more than 2% during early trading before paring losses, to eventually trail its counterparts with a 0.89% gain, changing hands at €5.82.