Expanding La Caixa

From his corner office on the 22nd floor of the Barcelona headquarters of savings bank La Caixa d’Estalvis i Pensions, Juan María Nin can gaze at various artifacts of his heritage. Looking east through the plate-glass windows, he can see the power station that his paternal grandfather, an engineer, once operated alongside the city’s Mediterranean port; Nin’s father, also an engineer, grew up in a small house on the plant’s grounds. Looking north toward Barcelona’s upper town , Nin can see the apartment building in which he was raised. No wonder the 55-year-old chief executive feels so at home here.

Just don’t mistake the cozy familiarity for provincialism. Nin is embarking on a bold expansion drive to take La Caixa far beyond its Catalan roots. Using the proceeds of a November 2007 IPO of La Caixa’s industrial holdings, the veteran banker has shelled out some €2.3 billion ($3.4 billion) to buy minority stakes in Bank of East Asia, a Hong Kong lender that’s pushing headlong across the border into China, and Grupo Financiero Inbursa, a Mexican financial services company controlled by billionaire Carlos Slim. Nin is also looking to snap up retail banks in the U.S. and Eastern Europe, while at home he moves into corporate banking and wealth management. He intends to transform La Caixa, Spain’s most profitable retail bank, into a global institution with the swagger and breadth to rival bigger compatriots like Banco Santander and Grupo BBVA.

“Our long-term aim is to keep performing well in the retail markets that have always been our specialty,” Nin told Institutional Investor in a recent interview at his office. But international expansion, combined with the new business lines in Spain, he insists, “will be the turbos behind the long-term growth of La Caixa.”

Such an ambitious agenda would be risky in the best of times, but Nin is pursuing his global quest in the midst of the worst financial crisis in a generation and with a management team that has little experience outside Iberia. “La Caixa has a great record, but the truth is that it wasn’t hard to compile,” says Jens Peters, a portfolio manager who runs €2 billion in assets at KBC Asset Management in Dublin. He notes that bank credit in Spain grew 25 percent annually over the past ten years and deposits grew by 15 percent a year. “The big question now is how easy will it be for La Caixa to transpose its model to new areas both in the increasingly crowded domestic market and internationally, where they are largely untested.”

Nin’s domestic market, moreover, is deteriorating rapidly, as the credit crisis deflates Spain’s real estate boom. Housing sales have fallen sharply in recent months, and prices have started to drop as well, casting a pall over the construction-dependent economy. In July the government slashed its growth forecast for the second time this year, to just 1.6 percent, which would be down from the 3.8 percent rise recorded in 2007. The slumping economy poses a serious threat to profitability at La Caixa; mortgages account for 70 percent of the bank’s €165.6 billion loan book. That threat was underscored dramatically in July when Martinsa-Fadesa, a property developer to which La Caixa had extended

€700 million in loans, was forced to seek court protection from creditors in the country’s biggest-ever bankruptcy filing. Even before that development La Caixa’s nonperforming loans had nearly doubled, to 1.26 percent of total loans at the end of June, from 0.68 percent three months earlier.

“It’s very likely that Spain’s banks have just seen the tip of the housing iceberg and that things could get a lot worse,” says Helmut Hipper, a fund manager at Union Investment in Frankfurt who has been selling financial stocks. “In a recession no Spanish bank will be spared.”

Nin acknowledges the difficulties but insists that La Caixa’s conservative lending policies will sustain profits and enable the bank to continue its expansion. La Caixa is Spain’s largest real estate lender, but its average loan amounts to only 52.5 percent of the value of the underlying property, according to Fitch Ratings. The bank also doesn’t lend for the construction of vacation homes, the market segment that has been hit hardest by the recent downturn. Although the bank’s nonperforming loan ratio rose sharply in the second quarter, it remained below that of rivals Grupo Banco Popular, which saw its ratio rise to 1.42 percent from 0.72 percent, and Banco Santander, whose ratio rose to 1.34 percent from 1.16 percent. Even with the increase in bad loans, La Caixa managed to post an 8.4 percent rise in first-half earnings, to €1.06 billion.

“We’ve always based retail lending on our customer’s ability to pay, not on asset values, so our ratio of nonperforming loans, both overall and in the real estate sector, should remain well below the average,” says Nin. “We expect to outperform even in the toughest of markets.”

Nin’s expansion into corporate lending will reduce La Caixa’s dependence on the mortgage market, but not on the Spanish economy. The bank this year opened a new unit, CaixaEmpresa, that is targeting Spain’s small and medium-size businesses. Caixa­Empresa opened 70 offices in the first half, and the effort helped push up business lending by 18.2 percent in the first half, the latest period for which detailed figures are available. Nin expects the corporate lending drive to reduce mortgages to 60 percent of La Caixa’s loan book by the end of this year.

Even fans of the bank’s strong domestic franchise express skepticism about Nin’s foreign strategy, however. Unlike Santander and BBVA, which have extensive networks of wholly owned subsidiaries across Latin America and Europe, La Caixa is expanding by taking minority stakes in other institutions, largely because of its limited firepower. The bank paid €680 million between October and March to acquire 9.72 percent of Bank of East Asia, and has agreed to spend €1.6 billion for 20 percent of Mexico’s Inbursa. Critics question how much influence La Caixa can hope to exercise through such stakes.

“The world is full of strategic minority stakes in the banking sector that have proved to be bad investments,” says Inigo Lecubarri, founder and manager of London-based Abaco Financials Fund, a €400 million investment fund that focuses on financial institutions. “Not only do you get risk you can’t control with a minority stake, but you may also get pushed out by a rival.”

The pragmatic Nin dismisses those concerns. He says that minority stakes are often the best way to get into promising markets, because La Caixa has a relatively modest budget and many targets’ managements want to remain independent. Moreover, he contends that the bank has demonstrated an ability to generate value with a minority stake through its experience with Portugal’s Banco BPI, of which it owns 27.5 percent. La Caixa first invested in BPI and took a board seat in 1995, when the institution was a small investment bank. Drawing on La Caixa’s capital as well as its experience in expanding in the Spanish retail market, BPI has grown steadily to become Portugal’s second-biggest retail lender. La Caixa’s presence was crucial last year in helping BPI fend off a hostile takeover offer from its main domestic rival, Millennium bcp.

“We will invest only where we have a clear alliance with management that protects both their interests and ours,” says Nin. “We may ultimately be in a situation where it makes sense both for ourselves and our partners to turn a minority stake into a majority stake, but we are practical, and our first priority is simply to build sound and profitable investments. Once we invest in a bank, our experience and market developments will determine what we do.”

Like most of Spain’s savings banks, La Caixa is a mutual institution. It is controlled by a 160-member general assembly in which depositors hold 58 seats; charities and community groups, 48; local government bodies, 34; and employees, 20. Fundació la Caixa, a charitable organization that finances everything from Alzheimer’s research and computers for classrooms to aid for immigrants and cultural exhibitions, receives 25 percent of the bank’s net profit each year.

With the approval of successive Catalan governments, La Caixa has grown from a regional lender in the 1980s to become Spain’s largest retail bank, with 5,581 branches, a 10 percent share of retail deposits and €264 billion in assets. The bank’s distinctive blue-star logo — designed by the Catalan artist Joan Miró — is ubiquitous on commercial streets across the country. Growth didn’t come at the expense of efficiency. La Caixa boasts some of the best operating metrics of any European lender, with costs amounting to just 42.5 percent of income in the second quarter of this year, the most recent period for which detailed figures are available; return on equity was 17.2 percent for the period.

“La Caixa’s stellar expansion record is built on proximity, service and simple but effective product innovation,” says the admiring chief financial officer of a rival, listed bank. “They became our fiercest competitor by expanding during a period when big banks were cutting costs by merging and closing branches.”

The bank has also promoted Catalan interests by taking stakes in a number of the region’s key industrial companies, including Gas Natural, Spain’s biggest supplier of natural gas; Abertis Infraestructuras, Europe’s biggest operator of toll roads and airports; and Sociedad General de Aguas de Barcelona, one of Spain’s biggest water companies. These stakes, held in a vehicle called Criteria CaixaCorp, are worth some €20.3 billion.

Notwithstanding it strengths, La Caixa faces hurdles to its continued growth. Many of Spain’s 46 other savings banks have taken a page from its playbook to enlarge their own networks in recent years, while Santander and BBVA have been aggressively expanding their domestic retail businesses.

Concerned about the growing competition and clouds over the Spanish property market, bank management, led by then-chairman Ricardo Fornesa and then–chief executive Isidro Fainé, recruited Nin in June 2007 to carry out a new strategy. Their plan involved floating a minority stake in Criteria Caixa through an IPO and using the proceeds to expand La Caixa’s business at home and abroad. They set an ambitious target of increasing profit by 20 percent a year through 2010.

“As an institution, we have a good sense of timing,” says Fainé, 66, who moved up to the chairman’s post at La Caixa while Fornesa, 76, became chairman of Criteria Caixa. “We brought in Nin and stepped back from our previous positions because his experience and profile as a leader fit perfectly with the current realities of La Caixa and our future objectives.”

One of Spain’s most experienced bankers, Nin obtained a law degree from Bilbao’s Universidad de Deusto, the training ground of many of the country’s top bankers, then earned a master’s in economics from the London School of Economics before entering the industry. He distinguished himself by building a successful centralized corporate banking division at Banco Central Hispano in the 1990s, then became head of corporate banking at Banco Santander, the country’s leading bank, after its 1999 merger with BCH. In 2002 he was recruited by another regional Catalan lender, Banco Sabadell, which he built into a national retail and corporate banking force during his five-year stint as chief executive.

Although proud of his Catalan roots, Nin insists he owes his loyalty to the bottom line. “I’ve always lived and died by the profit-and-loss account, not by political allegiance to a region,” says the silver-haired, no-nonsense banker. “Historically, it has been a basic tenet of La Caixa to perform as well as possible, since everyone here knows that is how to get the most money into the hands of the foundation.”

Nin aims to transform the industrial holding arm, Criteria Caixa, into an international financial services group. The November IPO raised €3.8 billion, and Nin plans to divest some noncore holdings to raise additional cash. Disposal targets include Criteria’s 5.73 percent stake in Spain’s Telefónica, worth €4.6 billion; its 12.7 percent interest in the country’s biggest oil company, Repsol YPF, valued at €3.2 billion; and its 5.01 percent holding in Bolsa y Mercados Españoles, which operates the Madrid stock exchange, worth €83 million.

By using the proceeds to make more overseas acquisitions, Nin expects to increase the weighting of financial services assets in Criteria to 60 percent within three to five years from about 24 percent currently. He aims to either buy banks outright or acquire stakes of at least 20 percent, which will allow La Caixa to consolidate earnings and, he believes, give it real influence. “We will demonstrate to our investors that Criteria is more than a holding company, but we certainly don’t expect to do that overnight,” he says.

Criteria’s existing financial assets include CaiFor, Spain’s largest life insurer; InverCaixa, Spain’s third-largest fund manager, with €14.5 billion in assets; Caixa Renting, a leasing unit; FinConsum, a consumer finance operation; and GestiCaixa, a small asset-backed-securitization unit. Nin transferred those businesses from the bank to Criteria before the IPO; the aim is to provide their products and expertise to La Caixa and to foreign banks that Criteria acquires or invests in.

Criteria also contains a newly beefed-up private banking arm, La Caixa Banca Privada. Nin jump-started the unit’s growth in January by acquiring the Spanish private banking business of Morgan Stanley for €546 million, with Criteria chipping in €120 million, or 22 percent, of the purchase price, equal to the percentage of the holding company not owned by La Caixa. The deal enables La Caixa to leap from seventh place in Spain’s wealth management market to third, behind Santander subsidiary Banif Banca Privada and Sabadell; the bank now has 36,000 clients with more than €500,000 in assets, up from 8,000 previously.

Nin’s strategy ultimately depends on international expansion, and it will take some time to determine whether his initial moves will pay off.

Bank of East Asia enjoys a strong franchise in Hong Kong and is one of the fastest-growing foreign banks in China, with 50 branches there. Nin would like to raise Criteria’s stake to 20 percent eventually, but that will depend on how its relationship with East Asia’s management develops. “Asia is a very difficult market to break into,” he acknowledges. The Hong Kong bank is controlled by chairman and CEO David Li, whose family founded the bank and who owns 4.61 percent. It also has another potential suitor: Bank of China snapped up a 5 percent interest in November, shortly after La Caixa began its buying.

So far La Caixa executives have little to show from talks with their counterparts at Bank of East Asia. “We have not yet come to the point where we can clearly see what kind of cooperation we can do on the retail front,” says Peter Yuen, head of relations with financial institutions at the Hong Kong lender. But, he adds, “in terms of corporate banking, there are many opportunities where we can channel business to each other in areas like trade finance, foreign exchange and letters of credit.”

Nin expects to have considerably more influence at Mexico’s Inbursa. As part of the agreement with Slim, who is an old friend of Fainé’s, La Caixa will appoint two people to the 15-person board and one executive to the 12-person management committee. Crucially, the Barcelona bank will have veto power over strategic decisions and capital increases.

Inbursa is Mexico’s biggest distributor of insurance and pension products, with 6.7 million clients and 1.8 trillion pesos ($178 billion) under management or in custody. The group’s Banco Inbursa is the country’s seventh-largest lender, with 132.4 billion pesos in assets and 91 branches. It is dwarfed by market leaders BBVA Bancomer and Citigroup-owned Grupo Financiero Banamex, both of which have more than 1,000 branches in the country.

“Inbursa’s dominance and strong brand reputation in insurance products but lack of presence in retail banking makes them an ideal ally for us,” says Francisco Reynés, managing director at Criteria Caixa. “We will help them expand their retail network and bring them new products like individual mortgages, credit cards and consumer financial products.”

“Inbursa is an efficient means for La Caixa to get access to a fast-growing market it does not know, while the Mexicans get an instant range of retail products and know-how that they lack,” says Cristina Torrella, banking analyst at Fitch Ratings in Barcelona.

For his next move, Nin is looking to acquire banks in the U.S. and Eastern Europe and believes the recent sharp decline in financial stocks presents a buying opportunity. He acknowledges having had takeover talks last winter with Brooklyn, New York–based Dime Community Bancshares. Nin won’t say when or if those talks might resume, but a senior Criteria executive says the bank is likely to hold off on any U.S. acquisitions for six months to a year to see if the country’s housing woes produce better bargains.

In Eastern Europe, where balance sheets have been largely unaffected by the subprime mortgage crisis, Nin says he’s actively talking to small and midsize banks. “In both the U.S. and Eastern Europe, we want to initially spend somewhere between €500 million and €2 billion buying a retail bank,” he says. “Wherever we go, we will look to eventually expand and consolidate through both organic growth and further acquisitions.”

Financing on that scale shouldn’t be a problem for Nin. Criteria can spend up to €493 million on acquisitions after the Inbursa purchase and still keep its debt-equity ratio below the conservative 20 percent ceiling that the CEO has set. And La Caixa itself has considerable spending power, given that the bank has tier-1 equity capital equal to 8.5 percent of assets. “Thanks to the excellent health of La Caixa, the strength of the euro and a market that is penalizing the share price for financial institutions, we think there may be some very interesting opportunities for us very soon,” says Reynés.

Many investors have their doubts about the strategy, though. Criteria’s share price has fallen nearly 34 percent since the IPO to trade at about €3.38 late last month; that price represents a steep discount of 41.5 percent to the holding company’s net asset value.

“The point of strategic investments in foreign markets is to open up long-term growth prospects that you can develop,” says one fund manager who spoke on condition of anonymity. “Criteria can’t be certain of doing that with minority investments, so there is little reason to buy the stock, especially when you can buy the shares of their partners directly.”

Nin will need to show some clear success in his foreign campaign to quiet the critics.