Although most Spanish banks have kept business close to home, that strategy is ripe for a change. Since Spanish banks have avoided the heavy losses other big European banks have experienced in overseas lending, they are now in great shape to take advantage of the growing global market.

"Margins are still much higher than in the rest of Europe, while operating expenses relative to other countries in Europe are much lower," said Stefano Natella, a banking analyst at First Boston Corp. in New York.

No Near-Term Threat

In fact, Spanish banks are likely to enjoy healthy earnings for some time.

"It's not inconceivable that margins will come under pressure" as the decade progresses, said Matthew Czepliewics, a banking analyst at Credit Suisse First Boston in London, but the notion that Spanish banks are "immediately vulnerable is a little misguided."

Spanish banks already rank among the most profitable in the world, with an average return on assets of 1.17% last year and an average return on equity of 18.2%, according to estimates by Credit Suisse First Boston.

Operating Expenses, meanwhile, average only 54% of operating income, considerably below the European average of 65%.

Despite the rosy outlook, Spain's banks are moving fast to cut costs in anticipation of tougher days ahead.

The most popular route has been through mergers.

Banco Central, for example, last year merged with Banco Hispano Americano to create Banco Central Hispanoamericano.

But by far the biggest realignment came when the Spanish government put several stateowned banks under a new holding company, Corporacion Bancaria Espana, creating Spain's biggest financial conglomerate.

One result of the mergers has been the closing of hundreds of small branches that Spanish banks had opened to collect cheap deposits. Analysts don't consider this a loss for the Spanish banking industry.

"Spain is one of the most overbranched countries in Europe," said Mr. Natella of First Boston. "As long as Spanish banks were paying below inflation rates on [their] deposit base, it made sense to have as many outlets as possible, but it's not cost-effective anymore."

Xenophobia Countered

Rapid consolidation has gone a long way toward building up strong national banks and countered fears that Spanish banking would be overrun by foreign competitors.

Deregulation also made Spain a tougher place for foreign banks to earn a peseta.

"As margins get tighter, it gets more difficult for a foreign bank to set up from scratch," said Charles Prescott, a banking analyst with IBCA Ltd. in London.

Cautious Moves Abroad

Spanish banks are unlikely to become involved in any largescale adventures abroad, although all the major Spanish banks have a presence in major financial centers abroad as well as in selected markets, such as Portugal, Puerto Rico, and Latin America.

Banco Santander is now the second-biggest bank in Puerto Rico. Banco Bilbao Vizcaya has expanded on the island recently by acquiring Royal Bank of Canada's 17-branch network and about $565 million in assets, bringing the bank's total assets in Puerto Rico to more than $1 billion.

"Returns on equity in Puerto Rico are around 25%, compared with 20% in Spain," said Banco Bilbao first deputy chairman Alfredo Saenz.

There is also room for expansion on the European continent.

In a recent deal, Banco Popular Espanol joined forces with Banco Comercial Portugues to run a retail banking business in France. And Banco Bilbao is looking for opportunities for European expansion.

"We would like to expand where we can bring added value," said Banco Bilbao's Mr. Saenz.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.