The Banking Armada

The past few years have seen the two largest Spanish banks (Santander & BBVA) become dominate players on the world stage as they have been on a shopping spree picking up large branch networks around the world on the back of their extremely robust balance sheets. These Spanish banks have a conservative regulatory system and sensible management to thank for their current healthy position.

Over the past few years these banks have begun building up a presence in the US and considering the rising number of troubled banks here they may start adding to their already growing branch network. However, I believe Canadian banks are the ones to watch, read on below for more...

Spanish banks

Given how well capitalized Spanish banks are at the moment it is hardly surprising to see them take advantage of the distress in US banking. Spanish banks have begun to buy up distressed US financial institutions giving them an immediate high street presence in the US market.

The most recent Spanish banking acquisition has seen Banco de Sabadell SA from Barcelona purchase Miami based Mellon United National Bank in July. Mellon United is a commercial banking company with 15 branches around South Florida and was sold by Bank of New York Mellon. This marks Sabadell's third Florida acquisition, having already acquired Banca Privada Internacional and TransAtlantic Bank, to become the sixth largest local bank in Florida by deposits.

In January Banco Santander SA purchased the remaining 75.65% shareholding it did not already own in Sovereign Bankcorp Inc. having acquired the initial 24.35% in 2006. Sovereign Bank is a large regional bank concentrated in the Northeast and boasts 750 branches stretching from Maine to Maryland. Santander had already acquired the private banking businesses of Bank of America operating in Miami, Texas and California in 2005 & 2006. Over the past few years Santander has grown to be one of the largest banks in the world having 80 million customers in 40 counties, $1.2 trillion in deposits & funds under management, and over 14,000 branches.

Meanwhile another Spanish behemoth BBVA (Banco Bilbao Vizcaya Argentaria) has been growing its US presence with the $9.8 billion purchase of Compass Bancshares Inc. in 2007. The Compass acquisition put BBVA among the top 20 commercial banks in the US at the time, and also makes it a regional powerhouse having a presence in Texas, Alabama, Arizona, New Mexico, Florida and Colorado with 579 branches. BBVA first bought two Texan banks, Texas Regional Bancshares and State National Bancshare Inc. in 2006 & 2007. Just this August BBVA Compass purchased the banking operations of Guaranty Bank based in Texas from the Federal Deposit Insurance Corporation (FDIC) acquiring $12.0 billion of assets and assuming $11.5 billion of deposits.

BBVA Compass entered into a loss sharing agreement with the FDIC that covers all of the acquired loans, where the FDIC will bear 80% of the first $2.3 billion of losses and 95% of the losses above that threshold. Guaranty Bank has 105 branches in Texas and 59 branches in California. This latest transaction now ranks BBVA as the 15th largest U.S. commercial bank with approximately $49 billion in deposits and operations in seven high growth markets in the Sunbelt.

Other Spanish acquisitions of note in the financial services sector are Caja Madrid's purchase of City National Bank of Florida, Mapfre SA purchase of Commerce Group Inc. (a property & casualty insurer), and Banco Popular Espanol SA purchased Totalbank Corp. of Miami. It should be no surprise of the interest level from Spain considering the increasing size of the Hispanic population in the US.

Spanish banks have remained in good shape throughout the current worldwide banking crisis due to conservative and sensible banking regulation handed down by Spanish regulators which required that they maintain a higher capital ratio to their lending, that full provisioning be made for problem loans, and they were prohibited from investing in the notorious toxic sub-prime assets. This sensible type of regulation and conservative management is a very similar to the situation in Canada, and the Canadian banks are in equally good shape right now.

There is a dissenting view however on the current good fortunes of the Spanish banks. The housing bubble in Spain was one of the worst worldwide, and to put it into perspective it has as many unsold homes today as the US, yet the US is six times bigger. Outstanding bank loans to Spanish developers have risen from €33.5 billion in 2000 to €318 billion in 2008. With unemployment at 17% and looking set to rise to 20%, the problems at home are surely going to test their provisioning and management.

Don't be surprised to see Canadian banks joining the Spanish in taking advantage of their current strength and begin picking up distressed banks throughout the US. As you will read next, the number of problem US banks is on the rise.

US banks "problem list" at a 15 year high

The number of US banks on the FDIC "problem list" has risen to its highest level in 15 years. It now stands at 416 banks with $229.8 billion of assets up from 305 banks with $220 billion of assets since last quarter.

Meanwhile the FDIC insurance fund which insures customers' deposits up to $250,000 per depositor has fallen from $13 billion to $10.4 billion since the last quarter, which is the lowest level it has been in 15 years.

Global real estate transactions on the rise

For the first time in 18 months global real estate transactions have risen quarter over quarter. Real estate transactions in the second quarter of 2009 increased by 17% to $62.8 billion from $53.6 billion in the first quarter. However the main contributor to this increase was from Asia and it was dominated by transactions in China. If the Chinese market is taken out of these figures, global transaction volume would have in fact been down by 8%. Chinese transactions exceed the combined transactions of the US & UK for the same period.

Despite the apparent turnaround in the volume of sales, it is an increase from anemic levels. The first six months of 2009 had $116.4 billion of transactions; this is down 35% from $179.1 billion for the first six months of 2008, and down 81% from $616.4 billion for the first six months of 2007. One positive to take from the latest figures is that the average deal size increased from $50 million to $65 million, indicating that liquidity is returning to the market.

Distressed assets (property in default, foreclosure or bankruptcy) has risen sharply to $233 billion globally, up 49% since Q1 2009, and up 112% since Q4 2008. The Americas account for a staggering proportion of this with $136 billion of distressed commercial real estate at Q2 2009 up from $80 billion in the prior quarter.