ECB's De Guindos says mergers can improve banks' profitability

By Jesús Aguado and Emma Pinedo

MADRID (Reuters) - The European Central Bank's vice president called on Monday for further consolidation and cost reductions by euro zone banks to improve battered profitability.

Banks are under pressure in Spain and other European countries to consolidate while facing rising bad loans amid the coronavirus pandemic and low interest rates.

"Removing cost excesses, over-capacity is more necessary than it was before the pandemic. Consolidation is a tool, it is not a goal in itself, but can be helpful in cost savings, in removing over-capacity," Luis de Guindos told a financial event hosted by the newspaper Expansion and consultants KPMG.

Last month's deal between Caixabank (MC:CABK) and Bankia (MC:BKIA) to create Spain's largest domestic bank boosted expectations of a new wave of mergers and acquisitions among Spanish banks. Their numbers have already fallen to 12 from 55 after the 2008 financial crisis.

Earlier in October, Spain's Unicaja (MC:UNI) and Liberbank (MC:LBK) began formal merger negotiations.

More flexibility from the ECB regarding capital requirements could pave the way for more consolidation among banks in Europe.

Italy's Intesa Sanpaolo (OTC:ISNPY) bought Unione di Banche Italiane (MI:UBI), while Spain's Sabadell (MC:SABE) has held informal talks about a possible tie-up, including with BBVA (MC:BBVA) and Santander (MC:SAN), sources told Reuters in September.

On Monday, BBVA's chief executive officer, Onur Genç, said the bank was open to analysing M&A opportunities both "in Spain and somewhere else" if they created shareholder value, although the bank was focused on organic growth.

Santander's chief executive officer, Jose Antonio Alvarez, said at the event the bank was not considering M&A.

Profitability across the euro zone's banks is low and the current economic crisis is expected to further hurt prospects.

De Guindos said that euro zone banks' return on capital (ROE) - a measure of profitability - had declined to around 2% as a consequence of the pandemic, which had led to higher provisions and lower revenues.

Before the coronavirus hit, ROE in the euro zone stood at 5%, De Guindos said.

He also said on Monday that European countries were reluctant to re-impose the kind of strict lockdowns seen at the end of March. He stressed that any withdrawal of stimulus measures to support European economies should be done gradually and in a calibrated manner.

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