Spain banking: Unicaja swims against the stream

By Eric Ellis

October 05, 2020

As Spain prepares to digest the €17 billion merger of CaixaBank and Bankia, Andalucían lender Unicaja faces a threat to its regional dominance. While its community roots are an advantage, it also needs an answer to the calls for change.

In the heart of the southern Spanish port of Malaga, one building soars unavoidably above the bustling cityscape: the headquarters of Banco Unicaja.

Built in a severe brutalist style that seems at odds with Malaga’s summery vibe, local commerce revolves around the Unicaja tower, extending across rural Andalucía beyond. Unicaja is the sum of a 1991 merger of a regional group of centuries-old savings thrifts and credit unions, or cajas, and is today a banking powerhouse in the region. No other Spanish bank comes near it here in terms of local spread, retail business and brand recognition.

Indeed, in many of Andalucía’s characteristic pueblos blancos, the area’s famous white villages, Unicaja is the only game in town. To many locals, Unicaja is simply ‘El banco.’

But Unicaja’s Malaga edifice reveals a deeper truth about this purely retail bank – its limitations, both geographical and in the business it does. And that has implications in the ever-changing Spanish banking sector, as the industry prepares for further consolidation following the announcement in September of the €17 billion acquisition of Madrid’s Bankia by Barcelona-based CaixaBank to create Spain’s biggest lender.

Since Spain’s crippling banking crisis of the early 2010s, the number of savings banks has contracted through failure and takeovers from around 45 to 12 today. Most of them are active in Malaga. From the Unicaja building’s upper floors, at least 10 other banks are visible along Malaga’s main Avenida de Andalucía; Spanish and foreign, all hungrily pitching for business – Unicaja’s business.

These deep-pocketed usurpers include Spain’s big five – the now-to-be-combined CaixaBank and Bankia, BBVA, Sabadell and Santander – as well as ING Bank and Deutsche Bank.

All are of them bigger, more sophisticated entities with broader franchises than Unicaja, though pointedly not in Andalucía, Spain’s most populous region. In this ancient land Unicaja’s HQ seems like a defiant citadel keeping well-armed aggressors from storming its ramparts.

Unicaja’s Oxford-educated chief financial officer, Pablo González Martín, doesn’t dispute the metaphor.

“Yes, they are getting close,” says the 25-year veteran of Unicaja, who is widely expected to be its next chief executive. “We know that it is competitive out there. That just makes us work harder and be as best as we can. In order to have a profitable retail banking franchise, you need to be among the top two to three players in the region where you are.”

Which Unicaja plainly is in Andalucía, a clear number one with about 25% of the market and as much as 30% in the sparsely populated central Spanish region of Castile and Leon, where in 2014 it bought another combination of cajas, the struggling EspañaDuero, in what was Unicaja’s only big sortie beyond Andalucía.

González says Unicaja’s strength is because it is a regional champion and a prudent one that boasts a common equity tier-1 ratio of 15.8%, the highest among Spain’s listed banks.

But as the industry consolidates, Unicaja’s dominance at home is also its problem, one heightened by the imminent CaixaBank-Bankia deal.

Unicaja is largely unknown beyond its two home regions, indeed, in the wider Spanish market, it is a relative minnow. Analysts calculate Unicaja’s national market share at around 3% in customer funds and 2% in loans.

With around €63 billion in assets, it floats between seventh and 10th spots on the national league table with Galicia’s Abanca, Zaragoza-based IberCaja and the Basque Kutxabank.

Madrid’s industrial-focused BankInter is at six. Then there is clear air to fifth place nationally, the Catalan bank Sabadell, which took over the UK’s TSB Bank in 2015 and is three to four times bigger in assets than Unicaja. The new Spanish leader, the prospective Caixa-Bankia, is nearly three times bigger again than Sabadell and around 10 times the size of Unicaja.

Citi bank analyst Stefan Nedialkov says Unicaja is “a big fish in the small pond of Andalucía, but a small fish in the big pond of Spain.”

The CaixaBank-Bankia merger has roused Unicaja’s management because it poses a direct challenge in western Andalucía around Seville and Cadiz, where Caixa is already Unicaja’s main competitor following its €1 billion purchase in 2012 of Banca Civica, which included the Andalucía-centric CajaSol.

For smaller banks like Unicaja, the deal raises questions of response and highlights the likelihood of more mergers and takeovers.

Unicaja is solely a retail bank – it doesn’t do big-ticket syndicate loans and has no fee-generating, deal-making investment bank in Spain’s equity capital markets.

“And we don’t want to be one,” says González.

Unicaja’s space to expand might seem limited, but González makes no apologies for its lack of national girth and clout.

“The problem is everyone was thinking to go beyond their home region because they wanted to diversify, so everyone was chasing that strategy,” he says. “We decided that wasn’t the right strategy because it was too expensive.”

González dismisses funding growth through corporate acquisition, which is a popular strategy among many of the country’s larger banks (Caixa was able to fund growth through large stakes in firms such as Telefonica and Repsol). Not only would this take too long, but, he says, it is not the right approach for the bank.

“It is a national thing when you go to corporate banking, but in household banking it is local; you need to know the people, the small and medium-sized enterprises, the suppliers, have ATMs close to where they work for the payrolls that we do for a lot of local companies.

“It is where we can make the economies of scale, to be more profitable,” he says. “We still have to deliver banking to all customers. They can have small banking needs, but still they need to have their pension, do payments and do some investments.”

González takes his counsel from the heady 2000s, when he remembers Unicaja being criticized by ratings agencies as not being competitive enough as Spanish markets took flight during frothy times.

“They said you’re not doing structured lending, that sort of thing,” recalls González. “We had double-digit growth, but I told them we didn’t want that kind of risk. And we were right. We want to be here through the cycle.”

The Costa del Sol became Spain’s bubbliest and then most seriously impacted property market during Spain’s banking crisis, which swallowed up household banking brands, led to a €40 billion bailout by the European Central Bank and even threatened Spain’s membership of the euro.

Unicaja was one of the few Spanish banks that did not receive state aid – a point of pride for González, which he puts down to the bank’s conservative culture. He says that Unicaja was seen as boring, but as things turned out, it was prudent.

Unicaja never went to shareholders for support, unlike BBVA, Caixa and Santander.

“We maintain our ties with the local communities because it helps us to have a prudent approach,” he says.

Being entrenched within local communities means “you know who is trustworthy, you have a strong relationship with the local business community, you know their customers, their suppliers.”

Expansion opportunities

Unicaja’s survival of the crisis opened expansion opportunities elsewhere in Spain, and in 2014 it took one, acquiring an ex-caja combine with a city-rural mix profile similar to itself, the struggling Salamanca-centred Banco CEISS, which dominated the Castille and Leon region as Unicaja did Andalucía.

CEISS had been bailed out by the Spanish state during the crisis but was barely breathing when Unicaja arrived with a bid. The deal took three years to absorb; today the expanded entity operates solely under the Unicaja marque.

Much of the €688 million raised by Unicaja’s 2017 IPO went to pay back Madrid’s handouts that kept CEISS afloat during the crisis.

But there are now fewer opportunities like that in Spain.

Unicaja was in protracted talks during 2018 and 2019 with Spain’s 12th biggest bank, Liberbank, which operates on Unicaja’s flanks in Extremadura and Castille-La Mancha, until Unicaja walked away from what would have become Spain’s sixth biggest bank.

But that was before the Caixa-Bankia deal and analysts believe it’s time for Unicaja’s proverbial Rolodex to be dusted off again.

González says: “We remain open to analyze any option in M&A that could be positive for earnings per share for our existing shareholders. We don’t believe in getting bigger just for the sake of getting bigger.”

Since 2017, when Morgan Stanley and UBS Group took Unicaja public, Unicaja has a new constituency to answer to: the stock market.

Francisco Riquel, senior banking analyst at Madrid brokerage Alantra Equities sees consolidation among Spanish smaller banks as key to their growth if not survival. He says the Caixa-Bankia deal is Spain’s big banks telling the country’s smaller banks that they are not interested in buying them, that there is little to gain from them.

With its vast network of branches, Riquel says Unicaja has a higher cost base than other Spanish banks.

“Its profitability could be much better,” he says, “its returns are poor.”

He describes Unicaja’s franchise as old-fashioned and traditional, lacking diversity and dynamism. He says Unicaja, as a listed bank and with a healthy balance sheet, has an opportunity to drive consolidation among Spain’s smaller banks.

Citi’s Nedialkov agrees that Unicaja is well placed to play a key role in the “in-organic growth” of lower-end market consolidation. Nedialkov says “we like that it’s risk-averse”, and has Unicaja rated as a buy.

But could Unicaja be bought?

Unlikely, say analysts, as it depends on its controlling shareholder, the Unicaja Banking Foundation. Some observers describe that as Unicaja owning itself.

Independently directed, the foundation is a charitable collection of regional interest groups and identities crucial to the creation of Unicaja and its caja predecessors. The foundation now controls 49.7% of Unicaja, with the family office of Andalucía’s richest family, the fashion-based Domínguez de Gor, owning around 6%.

Marbella-based shopping mall billionaire Tomas Olivo Lopez has around 3% to 4%, as does the Santander asset management group, the investment arm of Norway’s central bank and US fund manager Fidelity.

Riquel says the Unicaja foundation could be an impediment to Unicaja’s growth.

“It needs to be more dynamic,” he says. “Caixa is also controlled by a foundation, and look what it is doing.”

The bank was floated at €1.10 per share in the 2017 IPO; the share price peaked at €1.63 in June 2018. But since then it’s mostly been a steady slide to a low of €0.42 in May this year at the depths of Spain’s Covid-19 pandemic.

As Euromoney went to press, the stock was trading at €0.71, valuing the bank at just over €1 billion, about 70% of its 2017 IPO valuation.

Still, that seems positive compared with Spain’s other listed banks. Since mid 2017, the Bolsa de Madrid’s banking sub-index has fallen by around 70%.

CaixaBank stock has fallen steadily from a peak of €4.50 in June 2017 to €1.94 after the Bankia deal was announced. Since July 2017, Bankia stock has fallen from €4.62 to €1.44.

Unicaja Banco posted net profits of €172 million in 2019, up 12.9% on 2018, and announced as dividend a healthy 45% of income, although this was postponed as Unicaja complied with European Central Bank guidance to bolster balance sheets.

Earnings in the pandemic-hit six months to June 30, 2020 were steady at €86.25 million.

But one banking analyst says Unicaja hasn’t hit its IPO growth targets.

“Organic growth hasn’t worked in the way they’d hoped,” the analyst says.

With interest rates stagnant in its core home mortgage book, efforts to expand into more lucrative corporate and SME banking means Unicaja is competing with the nationwide banks.

“They don’t have an amazing product factory,” says the analyst, “and they just don’t have the scale like the others.”

The Andalucían market is tricky for any bank.

Some of the world’s oldest cities – Malaga, Cadiz, Granada, Sevilla and Huelva – are located here and tracts of its heavily-urbanized coastline, such as parts of the Costa del Sol, are wealthy international tourist playgrounds. But move a few kilometres away from these centres and the region’s agricultural base soon becomes strikingly evident. This is Andalucía profunda (deepest Andalucía), a mountainous undeveloped region that can be very conservative and often quite poor.

Villages here have a history of their townsfolk migrating to pursue education and jobs elsewhere in Spain because of the lack of economic opportunity at home.

With three million customers, about a quarter of the total population of its two main regions, Unicaja has deep roots in these communities. They are its legacy customers, carried over generations as the bank evolved through a series of mergers of village savings societies and thrift co-operatives, a network that partly arose because they were shunned by metropolitan banks.

A big chunk of Unicaja’s franchise remains in these rural communities and helps define the bank’s culture – of pensioners with passbooks, of over-the-counter deposits and withdrawals, where cash very much remains the preferred medium.

“This still belongs to our DNA,” says González. “Our very roots are in very strong local community ties. That’s where we come from, and we come with a plain vanilla product offering.”

González believes that the ever-continuing finessing of his deeply entrenched rural franchise may also prove Unicaja’s best defence, in part because Unicaja’s traditional customers are loyal, channel much of their financial needs through the bank and still value a physical branch.

But far-flung branches are expensive to run and staff, and Unicaja has 1,028 branches and 6,300 employees across Andalucía and the central region of Castille and Leon, the buildings split about 50-50 between Unicaja-owned and rented.

González wants fewer branches and staff but knows that his customers don’t always agree.

“You have to ask for a balance and we are closing branches,” he says, adding that Unicaja today has 20% fewer branches than four years ago.

Technology is helping bridge that divide – and trim Unicaja’s costs and headcount – but it can be a struggle to convince Unicaja’s rural base.

A feature of management life at the bank in recent years has been fielding petitions from remote communities anxious that their village is losing its bank, at least their physical one, and not being comfortable online.

For González and colleagues, it’s a diplomatic dance between the rigours of a stock-market listing and soothing a customer base that can be wary of change to lure them online.

“Though people are getting more used to online banking, they still need to sometimes go to a physical branch,” he says. “Your online life relates to your offline. The trend [to online] is unstoppable, but we don’t want people to be left behind. We have to try to maintain local interest.”

In its urban markets, González says, tech take-up has been as solid as any metropolitan market anywhere.

Unicaja invested strongly in technology, and its online offerings are intuitive and up-to-the-minute, run from a state-of-the-art data centre outside the tourist town of Ronda. The bank has even made royalties from licensing its tech backbone to banks in Latin America.

Although banks remained open during Spain’s strict Covid-19 lockdown, González says there was a sharp jump in Unicaja’s online users. Branch teller staff were re-assigned to online and telephone services during the pandemic.

Nevertheless, González thinks Unicaja’s local network is its true fortress. “When you go to another area, you don’t get the best-quality loans because the incumbent doesn’t know the nitty-gritty, good quality real-estate developer, the household situation,” he says. “In order to deliver financial services to these people, you need to have a local presence. [People] need to trust you, a branch manager that is known in the town.

“We still have to deliver banking to all customers. Our challenge is not to withdraw from these places but improve our services.”

TROUBLE IN THE SIERRA

Unicaja’s experience in Ronda – a town that has seen its economy transform from agricultural services to tourism – provides a model for the bank.

The magnificent headquarters of Caja de Ronda, a savings collective with religious roots, stood on Ronda’s main street for decades.

Caja de Ronda was one of the strongest of Unicaja’s component cajas and, in a land of intra-regional rivalries, initially resisted the push to merge.

A first among equals, Ronda’s culture infused the newly merged bank.

Pablo González Martín, Unicaja’s CFO, says: “It took quite some time for people to forget saying: ‘I am from Ronda, I am not Unicaja.’ Some people still say: ‘I am Unicaja Ronda,’ ‘I am Unicaja Almeria.’”

Ronda’s ornate banking hall – opposite one of Spain’s oldest bullrings – was a source of civic pride, a place to be seen. But that building was closed as a bank in 2016 and has since been transformed into a five-star hotel, the building rented from Unicaja. A utilitarian branch remains next door, but the banking chamber is now the hotel lobby.

While locals lament no longer banking in such grandeur, they are pleased the building has been faithfully maintained and that new jobs have been generated in the hotel. The hotel’s outlets are patronized by Unicaja customers. The outcome is seen as a win-win by locals and by Unicaja, which also banks the new business.

But deep in the sierra 50 kilometres south of Ronda in the village of Gaucin, opposition highlights Unicaja’s delicate dance with its client base. Local councillors last year launched a ‘Save our bank’ campaign after rumours spread among townsfolk that Unicaja was shutting the only bank in a town of 1,500.

Village mayor Pedro Godino set up posts around town imploring villagers to petition Unicaja to keep the branch “as crucial to our economy.”

Godino told villagers that Unicaja seemed “on the way to becoming a dividend-counting machine, forgetting what the essence of a savings bank is.”

He promised to help ensure “this basic service continues to be provided in our town”, one which had just been upgraded to high-speed fibre internet.

Suggestions that the council encourage tech-illiterate townsfolk to bank online and that, like Ronda, the Gaucin branch could be transformed, perhaps into a hotel or restaurant generating more local jobs than the three the Unicaja branch did, were not considered.

Unicaja deploys an agency model in such towns; in Gaucin it contracted a part-time out-of-town lawyer who fields much grumbling from locals feeling abandoned.

Is Unicaja’s agency banking model the half-way house to eventual closure?

“Probably,” says González. Branches in buildings that Unicaja owns are being sold and leases halted in branches it doesn’t own. “If you have a fixed cost, it’s hard to maintain good quality.”

González says he is sympathetic to customer concerns: “We are not leaving the customer without a bank. We try to fill the gap so the transition is smooth.”

But Alantra Equities analyst Francisco Riquel says Unicaja is being “too politically correct” to placate sentiments such as those of the Gaucin mayor.

“The world is changing,” Riquel says. “Online banking is inevitable and people need to understand that.”