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Pain in Spain Is Savers' Gain as Banks Battle to Win Deposits

Feb. 8 (Bloomberg) -- Across the street from Madrid's Las Ventas bullfighting arena another battle is brewing.

Posters in the window of the local branch of La Caixa, Spain's biggest savings bank, entice savers with accounts that pay 8 percent interest for the first month. A block away, Banco Pastor SA offers 5.22 percent and a Scandinavian comforter. Other banks offer pearls and Nintendos.

It's a scene repeated throughout Spain, where banks are vying for deposits to finance lending as the global credit crunch cuts off access to bond markets. Competition for funds has pushed the average interest rate on deposits of three months or more to 5.03 percent compared with an average of 3.64 percent throughout the eurozone, Spanish and European central bank data shows.

``They badly want customers' money, you can just tell,'' grain broker Luis Duran, 61, said as he left a Barclays Plc branch in downtown Madrid.

Spanish banks increased lending three times faster than they boosted deposits during the past decade to fund a building boom that helped economic growth outpace that of the euro region. That forced them to rely on bond funding and left lenders vulnerable when the subprime crisis caused investors to shun mortgage-backed securities, said Inigo Lecubarri, who helps manage about $250 million at PCE Investors in London.

`Deposit War'

``These are just the right conditions for a deposit war,'' Lecubarri said. ``They either find more deposits to finance themselves or they stop lending.''

Bank loans have risen to 173 percent of deposits from 122 percent a decade ago, according to a report from JPMorgan Chase & Co. European banks' average loan-to-deposit ratio is 123 percent. Securities now account for about 44 percent of funding, up from 15 percent in 2002.

No Spanish financial institution has raised money by selling mortgage-backed debt since November, Bloomberg data shows.

``It makes sense for Spanish banks to fund themselves in a more reliable way,'' said Peter Braendle, who manages about 64 billion francs ($58 billion) at Swisscanto Asset Management. ``But they're going to have to pay for it.''

Spanish bank shares have fallen as investors assess the impact of costlier funding. Banco Santander SA, Spain's biggest bank, is down 22 percent this year, compared with a 16 percent drop in the Bloomberg Europe Banks and Financial Services Index.

Aggressive Competition

Banco Popular Espanol SA, Spain's third-biggest bank, offers a deposit that climbs from 2.9 percent to 8 percent over six months, producing for an annual rate of 5 percent.

At the end of the third quarter, Madrid-based Popular was the ``most precarious'' of Spanish banks because of its reliance on bonds, mortgage debt and commercial paper, which made up 41 percent of assets compared with 36 percent for customer deposits, Standard & Poor's equity analysts said in a Jan. 15 report.

Popular's deposits increased by 16 percent in the fourth quarter, up from 5.9 percent a year earlier, the bank said Jan. 23, when it reported earnings. Client funds increased by more than loans for the first time in at least 12 years.

``The deposit war in Spain has just reopened,'' said Chairman Angel Ron. ``It has reopened because of this situation of closure of the international financial markets.''

Jorge Gost, chief executive officer of La Coruna-based Banco Pastor, said the bank's highest-paying deposits are only profitable if Pastor can persuade savers to take on additional products, such as credit cards and loans.

Pastor pays 5.22 percent for a one-year deposit and also offers gifts such as bed comforters. Other banks offer George Foreman grills and car navigation systems.

`Mean or Miserable?'

``If you've got the money for a bank deposit and you don't have a grill or a coffee machine, you're either mean or miserable,'' said Duran, the grain broker. ``I'm not taken in by these tricks.''

Still, the renewed courtship of savers is yielding results: Deposits increased 14 percent in the 12 months through November, up from 12 percent in 2006, according to central bank statistics. The drive for deposits contributed to a 19.4 billion-euro outflow from Spanish mutual funds in 2007, the trade group Inverco said.

The banks' challenge is to maintain deposit growth as homeowners' ability to save erodes, said Josep Prats, a fund manager at Ahorro Corporacion in Madrid. Average household debt in Spain has risen to 130 percent of income from 70 percent in 2000.

Not all banks have joined in the fray.

Banco Espanol de Credito SA, known as Banesto, won't raise interest rates to attract deposits, CEO Jose Antonio Garcia said Jan. 11, when the bank reported 2007 earnings. Savers will bring their deposits to Banesto because it is owned by Santander and can offer greater security, he said.

The glut provides an opportunity for savers to profit by moving their cash from one bank to another to take advantage of the various short-term offers, said Ruben Sanchez, a spokesman for Facua, a Seville-based consumer rights association.

``What's good for us may not be good for the bank,'' Duran said.

To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aLGoTwc1h69s
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