MADRID The ouster of Banco Popular's (POP.MC) chairman could mark it out for a potential takeover and trigger another round of mergers in Spain's banking sector, five years after the European financial crisis caused an earlier wave of consolidation.
Chairman Angel Ron had long maintained that Popular was financially strong enough to remain independent. But shareholders rebelled over his failure to clean up 30 billion euros ($32 billion) in toxic assets and on Thursday the bank said he would be replaced.
Popular's new leadership under JP Morgan Chase (JPM.N) Vice President Emilio Saracho and a record low share price could now spur a move from rivals who have been circling the bank, in turn triggering further consolidation, analysts and bankers say.
Spain's banking sector has already been culled from 55 to 14 players since 2008, when a property bubble burst forcing the government to clump together a number of failing lenders. But there is scope for the number to shrink further.
"The top four (banks) are sitting there thinking 'how are we going to play this out?'," one senior Madrid-based banker, who asked not to be named, said. "It is a very incestuous sector where nothing happens without them all knowing. They need a bit of a catalyst, someone to go first."
A report in Spanish newspaper Expansion on Thursday said Popular was in talks over a potential merger with BBVA (BBVA.MC), which with 10 times its stock market value has the buying power to make a move. Representatives for Popular and BBVA have declined to comment on any talks.
Popular's shareholder revolt was led by Mexican billionaire Antonio del Valle, who according to banking sources favors merging Popular with a competitor.
Spain's largest banks, Banco Santander (SAN.MC) and Caixabank (CABK.MC) as well as BBVA, have been slashing costs this year, which analysts say has helped defer the need for an expected second wave of consolidation. Uncertainty over a 10-month political deadlock on forming a new government also helped freeze deal-making.
But the big players are looking at acquisitions as a more long-term solution to shrinking margins and Popular is just one of several small and mid-sized lenders which could be targets.
Historically low interest rates and fierce competition for a shrinking loan book have on average halved banks' profitability rates since the crisis. In response, Santander, Caixabank and BBVA have all announced staff cuts and branch closures in Spain.
"This interest rate environment makes it impossible for banks to reach a sustainable profitability level, and the only way to improve it is through consolidation," Jose Luis Suarez, a professor of finance at Spain's IESE business school, said.
He said Popular's weakness would accelerate the process and he expected mergers to begin in the first half of next year.
Below the top tier, former savings banks such as Liberbank and Ibercaja, and even fifth-largest Banco Sabadell (SABE.MC), could attract suitors. But Popular could be the most tempting target given its price and its strong small-business portfolio.
Another banker in Madrid said it may not be worth the effort for big banks to buy smaller fry such as Ibercaja or Liberbank, but a bigger deal with Sabadell or Popular could be tempting.
Analysts at Morgan Stanley said a Popular-BBVA deal would make sense, noting Popular's shares have fallen 66 percent over the past year, making the bank three times cheaper than its book value, while BBVA's predominance in emerging markets means an expansion back in Spain could be beneficial.
Santander, BBVA and Caixabank's stated strategic plans do not include acquisitions, but they have all said they would consider opportunities.
IESE's Suarez said Caixabank, which made an informal approach to Popular in 2012, was the biggest contender for takeovers since its domestic focus has prevented it from finding more profitable business abroad, as have Santander and BBVA.
Caixabank, Spain's biggest bank by domestic assets, has seen its lending income stagnate over 2016 and it has made a bid for Portugal's Banco BPI (BBPI.LS), a major step outside its core Spanish market.
Policymakers both in Spain and across Europe favor more consolidation in the sector. The Spanish government is already working to merge Bankia (BKIA.MC), which was nationalized in 2012 with a 22 billion euro bailout, with smaller state-owned BMN, although it could open it up to outside bids.
"This process of consolidation has not been exhausted," Bank of Spain Governor Luis Maria Linde said last Friday.
(Additional reporting by Jose Elias Rodriguez; Editing by David Holmes)