Things are going as well as they can for Unicaja and Liberbank. The two Spanish banks agreed to combine last year in a piece of pandemic-inspired consolidation. The larger Unicaja posted a forecast-beating net profit of €43m at first-quarter results on Wednesday. But falling net interest income and higher loan loss provisions hint at why its steep discount to peers is likely to persist.

The tie-up will create the country’s fifth largest bank by assets as well as some of the biggest cost savings from recent bank mergers. Bloated head office costs and a sprawling branch network will be trimmed. Post-merger reductions target a cost-to-income ratio of 46 per cent, in line with higher rated locals such as BBVA.

Net interest income at Unicaja fell 4 per cent from the end of last year, thanks to narrowing spreads and lower yields on its Spanish government debt. Loan quality actually improved: non-performing loans fell 1 per cent from the end of last year to €2.25bn. But expect a reversal as government support measures and loan moratoria fade. That explains why both banks currently trade at 0.3 times their book values or less.

To be fair, Unicaja had prepped for a bigger hit. It booked an additional €25m of pandemic-related loss provisions. That decision will either prove to be overly cautious or sensibly justified as the extent of non-performing loan growth becomes clearer later this year. Those in the former camp will point out that the bulk of lending is in safe Spanish mortgages. But home loans have proved riskier in the past. Non-performing loan growth there correlates closer with unemployment growth, now rising, than in any other European country, says Citigroup.

That leaves a lot riding on an ambitious integration programme, aiming to lift returns on equity to 6 per cent by 2023. This looks a stretch. Spain deserves credit for encouraging banking consolidation, a dirty phrase in some other European countries. But do not expect this merger to turn the tide for Unicaja and Liberbank.

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