Tiny Spanish Bank Provides Survival Manual for Italian Peers, According to Reuters

By Jesús Aguado

ONTINYENT, Spain – A patient arrived at the local hospital, not seeking treatment but rather to discuss his mortgage with Dr. Antonio Carbonell, the town’s surgeon who also serves as the chairman of a small savings bank, Caixa Ontinyent.

Carbonell recounted the incident to highlight the deep local ties that support Caixa Ontinyent’s survival amidst Spain’s banking crisis. Out of more than 50 small savings banks, or cajas, in the country, Ontinyent is one of only two that weathered the recent banking turmoil.

The bank retreated from wholesale funding markets and stopped focusing on attracting new business. Instead, it concentrated on its existing clientele of mostly small savers, reinvesting profits to offset bad loans. As a result, the bank has flourished, reporting a 24 percent increase in profits in the first quarter of this year following a 13 percent rise in the previous year. Although its network of 49 branches is modest compared to larger competitors, it has slowly expanded.

With similar financial troubles emerging in Italy, where small banks are grappling with severe bad loan issues, Caixa Ontinyent’s success story is gaining attention. The bank’s straightforward message to struggling Italian lenders is to remain local, prioritize customer service, and promptly address financial challenges.

Italy is currently facing a banking crisis similar to what Spain experienced years ago, burdened by approximately 360 billion euros in bad loans. The Italian government aims to consolidate a vast network of cooperative banks, akin to Spain’s cajas, but progress has been sluggish, with no substantial mergers completed. Analysts note that many of Italy’s small banks have not been transparent about their issues.

Caixa Ontinyent’s resilience can be credited to its swift action when the property bubble burst. Vicente Ortiz, an advisor to the board, shared that prior to 2007, the bank’s strategy was simply to sell and grow. However, by 2008, it recognized the need to stabilize its financial standing.

Unlike its competitors, which continued to offer competitive rates while spiraling into crisis, Caixa Ontinyent halted commercial offers and focused on nurturing relationships with its existing small savers. As a result, client attrition reversed, and the bank now serves around 100,000 clients, up from 90,000 before the crisis, and manages 800 million euros in deposits.

In the face of widespread denial regarding a lending collapse, Caixa Ontinyent prioritized strengthening its financial ratios between 2008 and 2012, setting aside nearly all profits during certain years to enhance its loss coverage.

Maintaining close community ties has proven essential for Caixa Ontinyent’s turnaround. Despite still facing a significant volume of bad loans at around 12 percent, its coverage ratio stands at 74 percent, significantly higher than the average for the banking sector in Spain and Italy.

Experts highlight that the bank’s small size and community engagement have been beneficial for its recovery. However, replicating Ontinyent’s model may be challenging for small banks in Italy, where issues are more complex due to their exposure to business and household lending.

Italy’s intricate legal framework further complicates efforts to resolve non-performing loans, as lengthy court proceedings impede the swift recovery of collateral. The government is primarily focused on rescuing larger banks and has yet to make substantial headway in persuading smaller banks to merge.

As time is of the essence, Caixa Ontinyent’s experience emphasizes the critical need for small banks to act rapidly in identifying and addressing financial problems if they aspire to survive in today’s challenging landscape.