October 14, 2019 / 7:57 AM / a month ago

Low valuations hamper bank mergers in Europe: ECB's De Guindos

MADRID (Reuters) - Consolidation is inevitable among banks in the euro zone, but low profitability and low valuations will make this very difficult in a slowing economy, European Central Bank vice-president Luis de Guindos said on Monday.

FILE PHOTO: European Central Bank (ECB) Vice-President Luis de Guindos attends a news conference on the outcome of the meeting of the Governing Council, in Frankfurt, Germany, September 12, 2019. REUTERS/Ralph Orlowski/File Photo

Profitability across the euro zone bank sector is low and weakening economic growth in the region is expected to further dampen the banks’ prospects.

Last month, the ECB cut rates deeper into negative territory and promised bond purchases with no end-date, in a bid to reverse the renewed slowdown in the euro zone’s economy nearly a decade after the bloc’s debt crisis.

Banks have long complained that negative rates weigh on their profits.

“Low profitability in the end leads to low valuation, making the inevitable consolidation of the sector very difficult,” De Guindos said at a finance industry event in Madrid on Monday.

De Guindos said the low profitability of euro zone banks was also related to costly structures and excess capacity.

Along with other European banks, Spanish banks are struggling to increase profits as ultra low interest rates are squeezing returns. As a result, banks, such as Santander (SAN.MC) and Caixabank (CABK.MC), are cutting branches and boosting efforts to sell services on digital platforms.

Since the financial crisis in 2008, the number of branches in the Spanish banking sector has declined by more than 40%, while the number of employees has shrunk by more than 30%.

At the same event, ECB policymaker Pablo Hernandez de Cos said that in the current macroeconomic environment, it was likely interest rates would stay lower for longer, squeezing financial margins further. De Cos called for a strengthening of banks’ balance sheets and greater levels of efficiency.

Though regulators have repeatedly called for cross-border mergers as a way to gain more efficiency, both the chairman of Caixabank, Jordi Gual, and the chief executive of Santander, Jose Antonio Alvarez, said they did not foresee these kind of deals between lenders in the bloc right now.

In Spain, banks are still suffering from the after effects of reducing toxic legacy assets left on their balance sheets after the country’s real estate bubble burst in 2007, while households are still cutting outstanding debts.

But De Cos, the current governor of the Bank of Spain, said that a recent reduction in toxic real estate assets had allowed Spanish banks to perform more favorably in this year’s domestic stress tests than last year.

De Cos noted that the big Spanish lenders, such as Santander and BBVA (BBVA.MC), had fared better than the medium-sized and smaller Spanish banks due to greater international diversification.

Reporting by Jesús Aguado and Clara-Laeila Laudette; Editing by Jane Merriman and Mark Potter

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