A new price war among Spain's banks risks destroying already eroded profit margins by offering depositors ever higher interest rates to win new customers, in a desperate battle for capital they can't get elsewhere.
While the healthiest banks such as Santander and BBVA are not as aggressive in this fight, having already benefited from capital flight from weaker rivals, many have been cranking up deposit rates to win customers since Spain's central bank lifted penalties on high interest offers in August.
The banks had found ways around the restrictions by encouraging clients to withdraw deposits to buy the banks' own, riskier short-term debt, which is not protected by the schemes that guarantee conventional bank accounts.
That helped push private sector deposits to a more than three-year low in August, making it look as if money was streaming out of Spain's banks.
With many of the banks unable to raise cash on the money markets while Spain sits at the centre of the euro zone debt crisis, they are now forced to woo depositors with annual rates over 4 per cent – and as high as 8 per cent in one extreme case – well above the euro zone average of 2.7 per cent for two-year cash.
"It's a self-destructive strategy," said one Madrid-based banking analyst. "Margins are going to collapse. When banks have to apply this kind of practice it's because they are desperate."
Most Spanish banks are offering more than 3 per cent for new clients depositing at least €3,000 ($3,885) for a year or more, with lenders such as mid-sized Popular and savings bank Ibercaja offering in excess of 4 per cent.
And rates are expected to continue to rise while banks need capital.
"There will probably be an intensification of the deposit war this quarter in order to report good figures at the close of the year," Bankinter chief executive officer Maria Dolores Dancausa told analysts on a conference call.
Spain's banks are awaiting the first funds from a €100-billion credit line from Europe, aimed at propping up weak lenders brought low by a property crash and deep recession.
That weakness sent some customers scrambling for the exit.
ECB data shows Spanish deposits fell by €154-billion in the year to date.
That pushed Spain's overall loan-to-deposit ratio – a measure of liquidity – up to about 126 per cent in August, Citi estimates. At the beginning of the year it was around 113 per cent, while the euro zone average is 117 per cent and falling.
"If you can't access wholesale markets, you need to increase or maintain deposits just to replace maturing loans," said a London-based banking analyst, adding that this need was particularly acute at a time of shrinking deposits.
But in the race to catch customers, Spanish banks are paying out much more on deposits than they can make on advances, with variable-rate mortgages costing as little as 1.5 per cent.
The highest offer is from Popular, which is giving an 8-per-cent annual rate to customers who agree to convert the money into shares in the bank when it launches a €2.5-billion rights issue it needs to plug a capital hole and avoid taking international aid.
While that helped Popular lure €11.7-billion in deposits in September, the highest monthly amount for the bank in nearly two years, such creative offers are controversial, especially after the ill-fated stock market flotation of Bankia.
Bankia's IPO was heavily marketed to customers who subsequently lost most of their money when the bank had to be rescued by nationalization 10 months later.
Popular, which will launch its rights issue in December, was one of seven Spanish banks to fail an independent audit and stress test of the country's banks in September.
That means it must raise capital to prove that it could survive a severe economic downturn.
Ibercaja, which walked away from a merger with two other savings banks after it was identified as having a capital shortfall in the audit, is offering a deposit paying out 5 per cent on 70 per cent of the sum invested.
Even the state-rescued banks, awaiting the first funds from a European rescue before the end of the year, are offering rates above the European average, effectively at the expense of first Spanish taxpayers and then European taxpayers.
Bankia, CatalunyaCaixa and NovaGalicia are all offering rates of more than 3 per cent on certain products.
"Once the government decides it is not going to close these banks down, then they are really just like any other bank and they will respond to competitive challenges," said Javier Diaz Gimenez, economist at IESE business school.
Spanish banks have already fought their way through a deposit war in 2010 when an earlier spike in the euro zone crisis shut them out of wholesale markets, leading even banks like Santander and BBVA to offer rates of 4 per cent.
But competition cooled after the government acted to restrict payouts, forcing banks to increase payments into the state deposit guarantee fund for high-interest accounts.
The government scrapped the legislation on Aug. 31, and the effect has been stark; Private-sector deposits at Spanish banks rose for the first time in six months to €1.5-trillion at end-September.
But it is the sugar coating to a bitter pill of declining profitability.