By Jeannette Neumann and Christopher Bjork
MADRID-- Banco de Sabadell SA's bid for TSB Banking Group PLC
reflects a maxim of postcrisis banking in Spain: Diversify
abroad.
The profitability of Spanish banks such as Sabadell, the
country's No. 5 lender by market value, was hit hard when a real
estate boom went bust in 2008. Property developers defaulted on
tens of thousands of loans, saddling banks with bad debts that they
are working through today.
Spanish banks with large international operations such as Banco
Santander SA and Banco Bilbao Vizcaya Argentaria SA, however, had
units from the U.K. to Latin America and fared better than others
during the downturn, buoyed by returns in stronger markets
overseas.
Consequently, executives from small- and medium-size banks that
are primarily focused on the home market vowed in the aftermath of
the crisis to look beyond Spain's borders.
In that sense, Sabadell's move is the boldest yet by a Spanish
midsize bank. Both Sabadell and TSB on Thursday confirmed they are
in talks about a possible 1.7 billion-pound ($2.54 billion)
takeover, in what would be one of the largest European cross-border
banking acquisitions in years.
Still, some analysts said the proposed offer was too ambitious.
Shares in Sabadell closed down 6.64% in Madrid on Thursday.
Sabadell purchased six lenders in Spain between 2006 and 2014,
and it is digesting financial-crisis era acquisitions, such as
troubled regional savings bank Caja de Ahorros del Mediterráneo,
which it purchased in 2011 for 1 euro ($1.06).
TSB said Sabadell had indicated it expects to finance the
proposed takeover on a capital-neutral basis. Francisco Riquel, an
analyst with Madrid-based financial-services firm N+1 Group, said
Sabadell is likely to need around EUR1.2 billion in capital to fund
the deal.
A rights issue at a 30% discount to its current stock price
would require Sabadell to increase its shares outstanding by about
20%, diluting current shareholders, Mr. Riquel said in a research
note on Thursday.
Sabadell has long affirmed its aim to expand internationally.
But Mr. Riquel said, "We thought this was a long-term strategic
ambition."
"We would have preferred Sabadell to deploy its excess capital
in its Spanish market [organically or through acquisitions] now
that [economic] growth is gathering pace," he said.
In an interview with The Wall Street Journal last year, Sabadell
Chairman Josep Oliu said a lesson learned in Spain's financial
crisis was that it was necessary for the bank to build an
international presence. Mr. Oliu has been chairman since 1999 and
has a Ph.D. in economics from the University of Minnesota. Chief
Executive Jaime Guardiola also has international experience, after
running BBVA's Mexican unit.
Berenberg Bank analyst Nick Anderson said the takeover talks
with TSB raised questions about Sabadell's confidence in its home
market. "By bidding for TSB, they're saying their marginal euro is
best invested in a mature market at the top of cycle [U.K.] rather
than a supposedly recovering economy at [the] start of [a] cyclical
rebound [Spain]," Mr. Anderson said.
Sabadell already owns Miami-based Sabadell United Bank and
corporate lending operations in Mexico, but the bank said this week
it was eager to increase the proportion of annual net profit
generated abroad to 30% from around 8% now. It didn't say when it
aimed to hit that figure.
Sabadell has said it expects to get its full banking license in
Mexico this summer and that it would focus on loans to small- and
medium-size businesses.
The TSB takeover talks come as another Spanish lender, Caixabank
SA, is trying to expand in neighboring Portugal. Caixabank, Spain's
No. 3 bank by market value, last month offered to buy the 55.9% of
Banco BPI SA that it doesn't already own. The takeover bid has been
muddled as a top shareholder has suggested BPI instead merge with
another Portuguese bank.
Write to Jeannette Neumann at jeannette.neumann@wsj.com and
Christopher Bjork at christopher.bjork@wsj.com
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