Spain moves to ease bank merger fears Spain's larger banks will not be forced into politically motivated mergers, according to government officials, following concern that recent government pressure for consolidation could imperil the interests of their shareholders. Banks in Spain, which have been encouraged by new legislation to swallow weaker rivals, will not be railroaded into "unnatural mergers" that would risk frightening international investors and draining foreign capital from the sector, the officials said. Investors in BBVA and Santander, Spain's two largest banks by assets and those with the most geographically diverse shareholder bases, have expressed concerns that political considerations could create a "Lloyds-HBOS situation," in reference to the UK bank merger that saw the combined entity stumble into a state bail-out. "We have been examining the risks internally, and have talked with the banks," said one UK-based large institutional investor. They can say to the Spanish government, do you really want to create another Lloyds-HBOS situation, where a strong bank then needs state aid? Both Santander and BBVA have informed investors that they would not take any action that would be against their interests, according to people who have talked to the banks. The concerns about government interference follow new plans to force banks to realise larger losses on bad property loans and to accelerate consolidation in what is the world's most overbanked country, where it is estimated that there is one branch for every 1,000 people. Bankia, formed from a merger of seven regional savings bank to create the country's third-largest lender by assets, has been the subject of speculation, but has denied that it plans any merger with BBVA, Santander or La Caixa, the Catalan bank. If you asked me a year ago [about forced mergers], I would have said that the possibility was very, very low. Right now, I am not so sure," said Santiago Lopez, an analyst at Exane BNP Paribas. The new government in reality is taking certain measures that lead me to believe they could force stronger banks to take over weaker ones. The possibility is low, but not impossible. Mariano Rajoy, Spain's prime minister, has said further consolidation will be required. Under the new rules, banks that merge are given extra time to reach the increased provision needs set out by the government. Other analysts have argued that while Spain's larger banks would be unlikely to risk angering their investors by increasing their exposure to the troubled domestic market, a large deal would still be possible if the correct state incentives were offered, such as an asset protection scheme. "This could also been seen by management teams as a once-in-a-lifetime opportunity to become the dominant bank in Spain - but only if you cover your back," said Juan Pablo López, an analyst at Espirito Santo Investment Bank. He added: "Everything has a price, but if there is not an [asset protection scheme], shareholders probably would not be happy. To increase exposure to Spain right now would also be hard to sell to shareholders unless the price was very attractive. Sabadell, a midsized Catalan bank, was granted an asset protection scheme backed by Spain's industry funded deposit guarantee fund when it purchased the rescued caja CAM last year.