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EXCLUSIVE: It's Been Tough, But Spain's Private Banking Sector Is Seeing Recovery - Part 2

Stephen Little, Reporter, London, 28 November 2014

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In the second half of a feature on the Spanish wealth management arena, we look at M&A deals and the country's often contradictory tax regime.

This is the second half of a two-part feature examining the Spanish private banking and wealth management market; it is designed to shed light on a market that might not always get the attention it merits. We hope readers who have comments or insights of their own on this market send them to us. (To see the first part of this feature click here. To see a previous feature on the German wealth management arena, click here.)

In recent years, there has been a raft of mergers and acquisitions in the Spanish banking industry as firms look to reduce costs and improve profitability, resulting in fewer players with a higher market share. It is, of course, a phenomenon not exclusive to Spain - other countries have seen M&A activity, such as Switzerland and the UK.

This activity has in part been encouraged by the Spanish government, which after the collapse of the property boom amended laws to encourage mergers between banks to create fewer, but hopefully stronger institutions.

Most recently, Barclays agreed to sell its retail, wealth management and corporate banking businesses in Spain for €800 million ($1.05 billion) to CaixaBank, as it continues to revamp its European business. Other notable deals include CaixaBank buying Banca Civica for €977 million in 2012.

Juan Gandarias, CaixaBank private banking general manager, told WealthBriefing that as a result of its role in the restructuring of the Spanish banking industry and acquisitions made, it had seen client growth rise by over a fifth.

“Private banking has 44,867 customers, an increase from 36,519 in December 2011. This translates to a growth rate of almost 22 per cent in less than 3 years. Growth is linked to the major role CaixaBank has played in the restructuring of the Spanish banking industry, with acquisitions such as Banca Civica Banco de Valencia and more recently Barclays,” said Gandarias.

As firms look to make savings in order to cope in the new environment, many have sort to streamline their services through consolidation.

Last year, Bankia, Spain's fourth-largest bank by assets, announced it was realigning the component parts of its business and retail banking operations, a move that will see its private banking structure merge with the asset management business, while in 2013, Banco Santander absorbed private bank Banif into its business.

Alberto Calvo, head of BBVA Patrimonios, said that following a rash of acquisitions post-financial crisis and the consolidation of the sector, he now expected activity to decline.

“The savings banks have been seriously damaged and eventually been bailed out or bought by banks. Therefore the sector has shrunk in terms of players, who have increased their share. BBVA has taken advantage of this environment by acquiring Unnim and Catalunya Caixa, and has also benefited from the “flight-to-quality” effect in Spain,” said Calvo.

Taxation

Besides consolidation in the industry, changes to tax laws as they affect residents have also affected the Spanish wealth management market. Consider the significant changes to Spanish tax laws affecting residents. To be classed as a resident, you must have spent at least 183 days in Spain in one calendar year, or have your “centre of vital interests” there, that is, where most of your personal, financial and economic interests lie, or if your spouse lives there for more than 183 days during the year.

New disclosure rules mean that expats and residents must declare overseas assets above €50,000, including bank accounts, property and life assurance policies. Failing to do so could result in massive fines. A new double taxation agreement was also implemented between Spain and the UK and there are proposals to bring in new tax allowances to simplify the current tax bands from seven to five and reduce the top tax rate of 52 per cent by 7 per cent by 2016 for those earning more than €300,000.

“A reduction in the scale rates of income tax affecting earnings and pension income are material, with an anticipated effect for the average income tax burden to reduce by 12.5 per cent, and taxpayers with an annual income of less than €24,000 will see their income tax burden reduce by 23.5 per cent.  Even those with an income of €250,000 will see a material fall in their income tax burden,” said Jason Porter, director at international tax and wealth management advisor Blevins Franks.

“The majority of our clients who are resident in Spain have a pension and investment income.  Investment income has its own scale rates, the top rate of which is falling from 27 per cent to 24 per cent in 2015, then 23 per cent in 2016.  This should again see tax savings overall for our clients,” he added.

Wealth tax
Spain has one of the most punitive wealth taxes in Europe, with rates ranging from 0.2 per cent to 2.5 per cent for any excess over the given allowance.

The tax affects both Spanish residents and non-residents – the former on their worldwide assets above €1 million, the latter on their assets located in Spain in excess of €700,000.

After being abolished in 2008, the Spanish government reintroduced an asset-based wealth tax for 2011 to 2012 in a bid to cut its budget deficit following the bailout.

While wealth taxes have their proponents, notably French economist Thomas Piketty, who in his book Capital In The Twenty-First Century, argued that wealth taxes were a possible solution to economic inequality, they also have their critics, who point towards negative impacts such as capital flight and reduced investment. High wealth taxes in France, for example, are cited as a reason for an exodus from France to the UK.

Despite being introduced as a temporary measure, Spain's wealth tax was extended in 2013 and again in 2014. Although Spanish the government indicated in the 2014 Budget that it would propose abolishing it for 2015, it has since extended it for another year.

Porter said the wealth tax had made some clients “reconsider” their reasons for remaining in Spain with those at the end wealthier end of the scale with €10 million upwards of capital worth being the hardest hit.

“For the very wealthy, there is a very real financial impact in the wealth tax, which at 2.5 per cent at its highest rate, is a significant material cost on an annual basis. An asset/property rich individual worth €10 million, but with low income, would be severely impacted, and it is the movement of these individuals and families we are starting to see away from Spain and its islands,” he added.

“The threat of an exit tax in the future, even if this was restricted in the same way as it is in France, is also an unwelcome cloud on the horizon for those of wealth, and may be encouraging them to consider leaving sooner rather than later,” said Porter.

Golden Visa
On the other hand, while the country has extended wealth tax, it has also sought to lure overseas investors. Last year, Spain implemented a new law offering non-Europeans residency in exchange for cash. The so called Golden Visas were introduced to attract foreign investment and boost demand for property.

The new legislation offers residency permits to non-EU nationals in return for an investment of at least €500,000 ($680,382) into residential or commercial property and gives them freedom of movement in the 26 European countries covered by the Schengen Agreement.

They can also invest €1 million in the shares of a private Spanish company or in a bank deposit in a Spanish financial entity. Alternatively, applicants can get a visa by investing €2 million in Spanish government bonds.

One of the most controversial aspects of the idea is that investors don’t have to spend a minimum amount of time in Spain, allowing them to remain tax residents outside the country but giving them the benefits Spanish residency and the freedom of unlimited travel and circulation in the Schengen territory.

Despite hopes that Golden Visa would help boost investment and attract overseas buyers, only 72 had been issued in the first seven months of the programme, according Spanish newspaper El Pais. Citing data from the Department of Immigration, the paper said that Chinese and Russian buyers accounted for nearly half of the visas issued.

However, despite the best of intentions by the Spanish government, Jose Luis Jiménez, chief executive of March Gestión de Fondos, the wealth management arm of the March Group, believes the implementation of the golden visa was a “huge mistake” and does not provide the solution to Spain’s recent economic woes.

“Schemes like this have been put in place by governments in order to plug deficits and because they have debts to pay,” said Jiménez.

“From an economic point of view this is not the right approach. We need to focus on the fundamentals, trying to do the right thing for the economy that takes a long-term approach, rather than seeking a short-term fix,” he added.

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