Sowing the seeds of destruction

According to Ana Maria Liron, branch manager of the bank which manages €365m of loans and deposits, “We moved our headquarters in December from the town centre to these offices, thinking there would be faster expansion on the estate. But there is a big slowdown here… No one expected such a long, hard crisis.”

Unlisted regional banks such as Guadalajara, which account for about 50 percent of Spain’s financial system, have been hit hard by the recession and collapse of the real estate sector after a decade-long boom. To some extent, they have only themselves to blame.

“The savings banks’ big mistake was that they continued to increase their exposure to real estate developers even when the property bubble had burst,” said Jose Carlos Diez, chief economist at local brokerage Intermoney Valores.

Jorge Algarate Gonzalo, local sales representative at real estate firm Afirma Grupo Inmobiliario, agreed. “Everybody was living beyond their means,” he said.

Bad loans at small lenders saw a seven-fold increase in the period from December 2007 to March 2010, according to Bank of Spain and savings banks’ data.

To pay for their excesses, the regionally controlled savings banks are now immersed in a painful consolidation process aimed at recapitalising the weaker institutions and halving their numbers from 45 to about 20 by mid-year.

Ghost town of Valdeluz

Just north of Guadalajara, which is about 60km (40 miles) northeast of Madrid in the autonomous region of Castilla-La Mancha, lies the sprawling Valdeluz housing development, another example of the boom-to-bust fate of Spain’s property sector.

According to the initial planning permission lodged with the local town hall in Yebes, the development was intended for 8,500 homes, but only around 2,000 have so far been built.

Seven schools and a large commercial centre were also in the plans but Valdeluz is now no more than a ghost town, with only 1,400 people registered with the local council.

Empty streets with half-built blocks of apartments are littered with placards on every corner offering flats for sale with as much as 100 percent bank financing.

But a salesman to conduct visits to the show flats is nowhere to be found.

“On plan, Valdeluz looked as if it would be a fantastic development … But the reality is very different,” said Maria Angeles Martin, who rents a 120-square-metre three-bedroom apartment for €450 a month against €650 two years ago.

“The main problem is the lack of basic services such as a doctor’s surgery,” said the 28-year-old new mother as she stocked up on items in the community’s only supermarket.

As she spoke, two female employees shuffled goods around on full shelves in the otherwise empty Supermercado de Madrid.

Bank of Spain pressure

Caja Guadalajara’s main clients are households and small and medium-sized businesses and its exposure to property developers accounts for about 30 percent of total business.

Savings banks also act as charitable institutions and invest part of their profits in social and cultural associations.

Caja Guadalajara’s net profit plummeted 60 percent in the first quarter to March hit by the continued slump in loan growth, while its bad loans ratio stood at 5.28 percent compared with a Spain banking sector average of 5.30 percent.

After rejecting an integration project in the early 1990s with other savings banks in the same region, Caja Guadalajara is about to rubber stamp a merger with Seville-based CajaSol in southern Spain.    

“There has been much more pressure on the savings banks recently from the Bank of Spain as a result of the crisis,” Liron said.

“The crisis is accelerating the restructuring process but the consolidation was long overdue due to the excessive number of savings banks branches in Spain.”

The Bank of Spain took control of a small, 146-year-old bank controlled by the Catholic Church, CajaSur, on May 22nd, in a move interpreted as a warning to the sector to accelerate the merger process or risk a similar fate.

Three days later, the central bank further tightened the screws on Spanish banks by proposing even tougher  provisioning requirements for real estate assets on their balance sheets.

CajaSol has 5,000 employees against its future partner’s 325, but only has a scant presence in the Castilla-La Mancha region so there is no overlap, Liron said.

The new merged entity, which will have combined assets of 34bn euro. Caja Guadalajara will offer early retirement to nearly 14 percent of its 325 employees.

Politicians to blame?

For Caja Guadalajara’s clients, the upcoming merger with CajaSol is not a cause for concern. But they show suspicion and scorn that politicians are getting involved.

“The savings banks should be privatised and the politicians got rid of. Politicians need to be sent far away from the savings banks,” said one client in the bustling town centre who did not want to give his name.

Wrangling amongst savings banks in different regions vying for the upper hand in a future merged group have been one

of the main factors behind the delay in sector consolidation.

The Caja Guadalajar-CajaSol tie up will be Spain’s first inter-regional merger.

“The savings banks are controlled by politicians who don’t know what needs to be done,” said Antonio Maqueta, a retired 74-year-old businessman.