Announced more than a year ago, the largest merger in the Spanish banking sector for some time became a reality in early 2021. The Spanish competition authority cleared CaixaBank’s acquisition of state-owned financial entity Bankia – which was bailed out during the country’s banking crisis in 2012 – at Phase I, subject to conditions. This transaction is a merger between the third and the fourth largest banks in Spain, with €623.8bn in assets.
The new entity is expected to dominate the Spanish market, especially in retail banking. As executive chair José Ignacio Goirigolzarri said when the deal was confirmed: ‘The merger between CaixaBank and Bankia marks a milestone in the history of the Spanish financial system. We face this challenge from a position of strength that allows us to be an active part of the solution to the current crisis, as well as to become an important stakeholder for the socio-economic recovery of our country’.
It was therefore no surprise that this historic combination saw some of the leading firms in Spain line up to steer the merger through. Uría Menéndez advised CaixaBank, led by chair Luis de Carlos and Barcelona office partner Daniel Ripley, with Davis Polk providing US law advice, while Garrigues and Gómez-Acebo & Pombo acted for Bankia.
The role the banking sector will continue play in protecting the economic strength of Iberia – and with it the fate of leading commercial law firms in Spain and Portugal – cannot be overstated. As the CaixaBank acquisition followed reasonably hot on the heels of the Banco Santander acquisition of Banco Popular, a new wave of consolidation in the Spanish banking sector has been triggered and could revive moves by other banks to gain scale or strengthen their franchises or business models to remain competitive. But the financial services industry in both Portugal and Spain has been active for some time now – the need for consolidation is not new. For several years, the profitability of Iberian banks has been under pressure from low interest rates, subdued credit demand, increased regulatory costs and the need to invest in digitalisation. Some deals are at an advanced stage, including Abanca’s preliminary agreement with Crédit Agricole to acquire Bankoa. The long-running, on-off acquisition of Liberbank by Unicaja Banco – advised by Uría Menéndez managing partner Salvador Sánchez-Terán for Unicaja and Ramón y Cajal for Liberbank – was given the green light by the government in July, creating the country’s fifth largest bank.
Two new factors could now pave the way for banking consolidation to gather pace in Spain and Portugal. First, the economic fallout from the coronavirus pandemic could further weaken banks’ profitability. Second, the European Central Bank has signalled its willingness to ease some conditions for mergers, including not necessarily requiring higher capital ratios for the resulting entity.
And the market has certainly been awash with deals underlining the financial services sector’s desire to improve its standing. This has come in several forms, such as the disposal of non-core operating businesses, evidenced by four deals announced in April and May in Spain this year: Banco de Sabadell’s disposal of Aurica Capital Development; Crédit Agricole’s (advised by Cuatrecasas, led by Fernando Mínguez Hernández) disposal of 99.81% of Bankoa; EFG’s disposal of a minority stake in A&G; and Portuguese bank Novo Banco’s disposal of its Spanish branch business.
‘The new round of mergers in the Spanish banking system is keeping our corporate department very busy.’
Salvador Sánchez-Terán, Uría Menéndez
Another move is disposing of non-performing loan (NPL) portfolios, as seen by Uría advising Lone Star on the €800m acquisition of an NPL portfolio from Banco Sabadell. High NPL ratios impact on banks’ balance sheets and profitability, slowing down economic growth and the factors driving high NPL ratios in different EU countries have gained a lot of interest in recent years. However, NPL ratios in Portugal and Spain have started to come down sharply in recent years, showing that everything is moving in the right direction.
Sánchez-Terán says: ‘The new round of mergers in the Spanish banking system is keeping our corporate department very busy. There has also been a lot of movement in the real estate, technological, energy and insurance sectors in recent months, resulting in a significant number of transactions.’
Portuguese banks and other entities in the financial and insurance sectors have also focused on selling non-core assets and businesses. Speaking to Legal Business earlier this year, Bruno Ferreira, co-managing partner at PLMJ, noted: ‘What we will probably see is more activity in terms of restructuring businesses. We have had some bank moratoriums in place for the better part of 2020 and this will also continue until the first quarter of 2021. However, after that, there will be a significant liquidity impact once the bank moratoriums are terminated. So as a result of that, I think that, in terms of both M&A and financial restructuring and labour restructuring and operational restructuring, the Portuguese market will see a lot of activity in 2021.’
And there has been plenty of banking sector activity already, such as Davidson Kempner’s acquisition of €216.3m of NPLs from Novo Banco. And it is needed, with the banking sector arguably in need of substantial transformation – via consolidation and cost-cutting – to revive the sector. Large banks such as Caixa Geral de Depósitos (CGD), Millennium bcp and Novo Banco may well be considering merging into a single large Portuguese bank. Cost-cutting may come in the form of moving away from bricks and mortar bank branches as Covid-19 has accelerated the global move towards digital banking and unprofitable physical presence in towns and cities.
Strong reserves
With all this activity in the banking sector alone, Iberian lawyers are talking a strong game, and are defying any negative fallout from the global pandemic. Sánchez-Terán says despite its difficulties, 2020 was by and large a satisfactory year for the firm. All practice areas and offices performed commendably despite the uncertainty experienced during the most critical months of the pandemic.
‘We had a brilliant first quarter followed by an abrupt decline in April, May and June, although activity levels rebounded during the second half of the year and continued through the end of 2020,’ he says. ‘2021 is going well and we expect to close the year with good results. Our current workload is high across the board, with all practice areas and offices busy. Excess market liquidity is leading to a solid flow of foreign investment in Iberia, as well as significant M&A deals in hot sectors such as real estate, tourism, energy and renewables. There is also significant activity in capital markets with debt and rights issues as well as real-estate investments.’
‘The firm was able to grow turnover almost 1% in 2020-21. This has been possible because of the strong relationship with
our clients who trust us.’
Carlos Rueda, Gómez-Acebo & Pombo
Importantly, he adds: ‘This trend is not exclusive to Uría Menéndez, as it can be seen in the Iberian legal market in general throughout 2020.’
Adds Gómez-Acebo & Pombo managing partner Carlos Rueda: ‘From 2019 to 2020, the firm grew 14.6% in Spain and 13.4% in general. Due to the pandemic, activity in the Spanish market in 2020 slowed dramatically. This meant that firms dropped either revenue or clients. However, the firm was able to grow turnover almost 1% in 2020-21. This has been possible because of the strong relationship with our clients who trust us, which demonstrates the firm’s ability both to retain clients on a long-term basis and to maintain its turnover and activity during difficult situations such as the pandemic. Additionally, as mentioned, the firm did not take any additional measures to keep its financial situation stable or to keep its business growing.’
In Portugal, João Vieira de Almeida, managing partner of leading firm VdA notes: ‘The last financial year was very good for VdA and our direct competitors. Medium-sized firms, however, suffered during the pandemic. It was much better than we could anticipate, not only in financial terms but particularly in what it showed we are capable of when adversity strikes. The team stayed together, a specific plan was put in place to keep clients engaged and to develop customised solutions to the problems they were facing with the pandemic, and we beat the odds and gave our best performance ever.
‘This year looks good and we are on target to meet the budget, both in terms of top line and revenues. I would expect this to be the case as well with the biggest firms in Portugal.’
However, Nelson Raposo Bernardo, managing partner of Portuguese firm Raposo Bernardo, refutes the suggestion that mid-sized firms in the region have struggled: ‘In a severe crisis situation, the law firms that can potentially fare best are those with a more agile and versatile structure, but at the same time have the same capacity to access the most important mandates. The large firms can be very top-heavy in such a scenario and the smaller firms may not have the team capacity to respond to a lot of requests. So the ones that seem to me that may be better prepared are the ones that maintain such responsiveness and at the same time are more flexible and have a more agile structure.’
He continues: ‘The Portuguese economy has maintained some resilience to the impact of the pandemic, which has contributed to the fact that in the last year there have been no relevant changes. On the contrary, there are areas that have grown because of the pandemic, such as employment, contracts, insurance, data protection, litigation and restructuring to add to others that have always been on the rise, such as M&A, real estate and foreign investment.
‘Last year our firm kept up with this trend and maintained the pace of growth it had brought in from the years prior to the pandemic. Just as important is the fact that the expectations for the end of the year and for next year are very positive, with an even greater growth expected in company transactions and real estate. There are many appealing companies in the market, with good products, excellent brands and high installed production capacity, which are excellent investment opportunities.’
‘The Portuguese economy has maintained some resilience to the impact of the pandemic, which has contributed to the fact that in the last year there have been no relevant changes.’
Nelson Raposo Bernardo, Raposo Bernardo
Iberia has lost none of its attractiveness to global legal juggernauts either. While the pace of international firms launching in Spain has inevitably dropped off in recent years, June 2021 saw Eversheds Sutherland make a move into Portugal. The firm said it had strengthened its position in Europe and Africa by combining with leading full-service law firm FCB in Portugal, and its associated firms in Angola and Mozambique. FCB has a longstanding relationship with Eversheds stretching back over a decade and this combination will enable it to expand its offering to its global client base across three new markets.
FCB advises international clients from three offices in Lisbon, Porto and Faro, and offices in Mozambique and Angola through associated local firms. Gonçalo da Cunha, a partner at Eversheds Sutherland FCB (Portugal) commented at the time that the deal was announced: ‘By joining forces, we will deepen our ongoing relationship to the benefit of our international clients. We look forward to building and strengthening relationships with colleagues across the firm’s global office network and supporting clients on their activity across Europe, Africa and Latin America.’
Status quo
However, according to the established players, the hierarchy in both Portugal and Spain remains the same as it ever was. While a continual influx of foreign players has seen some international firms establish credible footholds in the market – particularly in Madrid – three leading independent players continue to dominate the legal market in each country.
In Spain, the legal market remains relatively stable. Renowned local firms Uría Menéndez, Garrigues and Cuatrecasas, along with UK firms Clifford Chance, Linklaters and Allen & Overy, still dominate in many key areas, particularly in M&A, banking, restructuring and dispute resolution. Pérez-Llorca continues to invest and has made several significant hires, notably in the areas of insurance, dispute resolution and real estate. Latham & Watkins has also not slowed its expansion in Spain; 2020 saw the firm boosting its real estate capacity with several prominent additions. Gómez-Acebo & Pombo – nominated for International Firm of the Year at the 2021 Legal Business Awards alongside Garrigues, Uría and VdA – has continued to make significant strides to be a credible alternative and competitor to Spain’s big three.
Says Rueda: ‘In general, the legal market in Spain on a financial level has kept stable. We and the majority of our competitors have kept stable in terms of results. Some have grown moderately, others more via more aggressive strategies and some have lost a little, but in general, the players have been stable despite the difficulties brought about by the pandemic.’
‘The pandemic has consolidated the market as it existed in the pre-Covid era, with three Portuguese independent firms leading the pack.’
João Vieira de Almeida, VdA
In Portugal, Morais Leitão, Galvão Teles, Soares da Silva & Associados, VdA and PLMJ still dominate in high-end transactions and deals, while Iberian firms Garrigues, Uría Menéndez – Proença de Carvalho, Cuatrecasas and Gómez-Acebo & Pombo demonstrate their strong credentials in domestic Portuguese matters.
International outfits Linklaters, CMS and DLA Piper ABBC are also active in Portugal. Says Vieira de Almeida: ‘The pandemic has consolidated the market as it existed in the pre-Covid era, with three Portuguese independent firms leading the pack. The biggest challenges do not come from competitors, but rather from changes in the market and to the business, as digitalisation, ALSPs, people expectations and new engagement models with clients and other stakeholders take hold.’
However, Nuno Galvão Teles, managing partner of Morais Leitão, sounds a note of caution. ‘The legal market has struggled to find an optimal point. It suffered immensely during the last financial and economic crisis: at a time when international law firms and consultants were establishing themselves in the market, pricing dropped, while some sectors almost completely stopped their activity. At the same time, technology, cybersecurity and overall compliance are pushing up internal costs, allowing for some concentration and mergers. Firms learned some really hard lessons – which paved the way for resilience and better performances.’
Adds Sánchez-Terán: ‘There has been an obvious flight to quality. In adverse times, clients look for external advisers to provide more value with the highest levels of excellence in their legal work. Companies nowadays have large in-house legal teams that carry out an extremely wide array of tasks and draw on law firms for the more complex issues that are directly linked to the company’s strategic goals. This is where we excel.’ LB