Spain’s largest banking groups – BBVA, Santander, Caixabank (and previously Bankia), Sabadell, Unicaja and Liberbank – have been focusing on the size of their branch networks and staff needs in order to improve cost efficiencies and capture the benefits of the shift to digital, especially in light of recent M&A.

This issue has thrown into sharp focus the need to balance financial concerns with social concerns, especially during a pandemic that has induced a sharp economic recession. Pushing to cut costs and laying off people while the outlook for the Spanish economy is grim has hit a nerve among the populace in Spain. On the other hand, the Governor of the Bank of Spain highlighted recently that weak bank profitability is a problem for financial stability hence for society. But the timing of the banks’ actions to improve margins looks poor. It therefore remains a tough balancing act for the banks to meet their social and economic goals.

The drivers of banks’ cost-cutting initiatives precede the pandemic but have accelerated as a result of it. Monetary policy is unlikely to shift materially in the near to medium term, even with the spectre of inflation, so opportunities to grow net interest margins will be slow to emerge. The extraordinary monetary and fiscal support tools that were implemented from 2020 prevented serious damage to businesses and households but also made the need for the banks to act more urgent.

In the circumstances, the only option for banks is to increase margins by cutting costs on their legacy branch networks while investing in digital.

The shift to digitisation, in play pre-Covid, has taken a big step forward during the pandemic. Bank customers in Spain and elsewhere have shown an increasing preference for using digital channels, which is a game changer for banks. Investment in digital technology is vital for future-proofing business models and therefore requires banks to free up their budgets to re-invest in technology upgrades.

Spanish banks have made significant progress in branch rationalisation in recent years. In 2010, there were 125 branches per 100,000 of population aged between 15 and 74 in Spain. In 2020, that had halved to 62.5. From having the largest distribution networks relative to population size, Spain has closed the gap to France, which now has the higher density of 67 branches per 100,000 population.

In the past 10 years, almost 21,000 branches have closed in Spain. By comparison Germany has closed 14,000; and Italy 10,000. In doing so, Spanish banks have reduced their headcount by 90,000, one third of the total. The reduction in Germany is 93,000 but that accounts for just 15% of the total, according to ECB data.

Looking at the performance of Spanish banks in aggregate over the past 10 years, there is little evidence that shrinking distribution networks have led to material improvements in pre-provision earnings, though. Margins are still eroded by a cost base (adjusted for assets) that has shown little improvement. Re-investing cost savings in digital acceleration has been an important factor but one whose full potential is yet to be reflected in the P&L.

Santander
At the end of 2020, Santander announced 3,572 layoffs for 2021, 12% of the total domestic workforce. The group is planning to close one-third of its 1,033 Spanish branches to drive underlying return on tangible equity (ROTE) over the medium term to 12%-13% and an efficiency ratio of approximately 43% in Europe, including Santander Consumer Finance and Openbank, the group’s online bank. This compares with ROTE of 10% in 2019 and a 52.6% efficiency ratio.

BBVA
BBVA had planned 3,800 job cuts but this was revised to 3,300 after consultations with unions. In June 2020, management had talked about 2,935 job cuts, 9.7% of the 2019 domestic workforce, and 480 Spanish branches closures, 18% of the 2019 total. Management expects to recoup the costs of collective layoffs and branch closures (approx. EUR 960m this year) by mid-2024 via savings of EUR250m from 2022. BBVA’s Spain cost/income ratio was 55% in 2020. Assuming flat revenues versus 2020 and no reinvestment, this would mean at best a 50% efficiency ratio in 2022.

Banco de Sabadell
In November 2020, Sabadell reached an agreement with unions on 1,800 layoffs in Spain (11% of the 2020 domestic workforce) having already closed over 200 branches during the year. And more is to come: as highlighted in the strategy 2021-2023 presentation in May 2021, management intends to radically transform its Spanish retail banking business through cost reduction and digitalisation. The new efficiency programme will launch in the first quarter of 2022 and result in in EUR 100m in annual gross savings.

CaixaBank
In April, CaixaBank announced a collective dismissal plan (Expediente de Regulación de Empleo or ERE) for 8,291 layoffs, 19% of its year-end 2020 Spanish workforce post-merger with Bankia. Negotiations with unions are underway, with the bank revising layoffs to 6.950 after employees went on strike in June. There is unconfirmed talk of 1,500 branch closures, 25% of the total. The merger with Bankia was expected to drive layoffs, given the duplication of functions.

The merged entity is also dealing with fallout from the steep increase in the chairman’s remuneration. Shareholders backed the increase but some, including the government’s bank resolution agency FROB, voted against as the Spanish government attempts to restrain executive compensation.